HA1020 Accounting Principles & Practices Lec 8

HA1020 Accounting Principles &
Practices
Lecture 8 Internal Control & Cash Management

Topics covered in this Lecture
• This session we look at how cash is managed,

considering:
• Control of cash
• Bank reconciliations
• Petty cash
• Cash budgeting
• We finish looking at (briefly) considerations for
cash management
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Applied Business Statistics for Managers
Cash defined
• Cash is a term to
• Identify Money
• Duplicates of credit card and EFTPOS (direct
debit) sales
• Other negotiable instruments
• Cheques ( these are becoming obsolete as an
old and often unreliable technology). Note:
Banks still issue Bank Cheques!
• postal notes
• that a financial institution will accept
• “Cash” must be readily available to pay
liabilities as they fall due, cannot
be subject to any restrictions
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Control of cash
▪ Cash is the asset most subject to theft

▪ Need a good internal control system for
handling cash and recording cash
transactions
▪ 3 important principles
▪ Separation of responsibility for handling and
custodianship of cash from maintaining records
for cash which we call “segregation”.
▪ Banking intact each day’s cash receipts
▪ Making all payments by electronic transfer or
by cheque
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Control of cash receipts
▪ Cash received through the mail

▪ Control relies heavily on separation of
record keeping and custodianship
▪ Cash receipts from cash sales
▪ Use of cash register
▪ Pre-numbered sales dockets
▪ Cash short and over (called unders &
overs)
▪ Cash shortage is recorded when daily
sales are recorded
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Internal Control and cash receipts
Internal Control concepts Cash receipts application examples
Clear responsibility Designated cashiers
Separation of recording and custodianship Handling cash, banking cash or recording

receipts
Division of responsibility for Mail clerk records receipts while

related transactions supervised
Mechanical and electronic devices Cash registers and EFTPOS equipment
Physical control Use of a safe to store cash
Other Pre-numbered sales dockets and

receipt forms; all employees take
holiday
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Internal Control and cash payments
Internal Control concepts Cash receipts application examples
Clear responsibility Authorisation of payment
Separation of recording and custodianship Signing payment instruments and recording

payments in accounting records
Division of responsibility for Authorising payments and signing the

related transactions cheques or making electronic funds
transfer
Mechanical and electronic devices Use of cheque printing machines
Physical control Use of a safe to store unused blank cheques
Other Sequentially pre-numbered cheques;

use of petty cash system
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Internal Control Cases
▪ Comment on the adequacy of internal control:

▪ The cashier records the receipt of cash, banks it and
also keeps the ledger.
▪ The office manager authorises the payments of salaries and
also prepares sales invoices
▪ Our bookkeeper is very loyal and efficient. She handles all the
banking and the records and hasn’t even taken annual leave for
five years
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Internal Control Cases continue
1. Inappropriate – recording and custody not separated. The
cashier can ensure that the initial record matches the bank
deposit – it should be the other way around – and the
opportunity to pick up any discrepancy is lost because he/she
keeps the ledger
2. Inappropriate – recording custody and authorisation not

separated. The office manager can ensure that the record
matches the goods in the store. In addition, the usual way of
ensuring that items are issued only for bona fide reasons has
been lost.
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2. There is no direct link between these two activities so there is

no breach of the rule about separation of duties. But the
company carries risk on business continuity in case the
bookkeeper suddenly decides to claim her leave and no
adequate training has been provided to another person.
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Bank accounts and reconciliation
▪ Additional internal control can be achieved by
comparing the bank statement with the deposit
and withdrawal records.
▪ This is achieved with a bank reconciliation
statement
▪ The bank statement
▪ Record of transactions from the bank plus some additional
source
▪ See next skide
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Bank accounts and reconciliation
▪ The bank statement
▪ Record of transactions from the bank plus some additional
source
▪ information (interest, bank fees, etc.)
▪ It should be noted that the bank statement is issued
from the perspective of the bank, NOT THE CLIENT.
▪ Monies in a client statement show as a CR meaning that
this is a Liability of the bank.
▪ If it shows as a DR, then this means that it is an Asset ofthe
▪ bank, you owe them money
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Bank statement
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Bank reconciliation
▪ Balance per books rarely agrees with
balance as per bank statement
▪ Differences include
▪ Outstanding cheques
▪ Deposits in transit
▪ Other transactions
▪ Service and bank charges
▪ Charges for dishonoured cheques
▪ Interest
▪ EFT transactions
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Bank reconciliation
▪ Bank reconciliation involves
▪ comparing the balance in the cash at bank ledger with the bank
balance according to the company’s bankers (as shown on the
bank statement), and
▪ explaining any differences between the two figures.
Adjusted cash balance as per the bank
Equals
Adjusted cash balance as per cash account in the company’s ledger.
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Bank reconciliation continued
▪ Reconciliation procedure
▪ Need to have
▪ Last bank reconciliation
▪ Cash receipts and cash payments journals for
the period
▪ Cash at bank ledger account
▪ Bank statement for the period since the
last reconciliation
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• Steps in process
• 1.Check that all items from previous reconciliation
are cleared
• Check the reconciling items from last month’s
reconciliation statement to this month’s bank
statement – tick items in both statements.
• items remaining unticked in last month’s
reconciliation are carried forward to this
month’s reconciliation (closing reconciliation).
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• Compare the cash journals to bank

statement
• Compare the bank statement DRs to cash payments
records and mark off common items
• Compare bank statement CRs to cash receipts records
and
• mark off common items
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3. Examine what are the unmarked items on bank
statement, Update the firm’s cash records:
i) Unmarked Dr items on the bank statement
▪  cash payments journal (eg. Bank fees)
ii) Unmarked Cr items on the bank statement
▪  cash receipts journal (eg. Interest)
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4. Items in the cash receipts/payments records

remaining unmarked indicate transactions not
yet recorded by the bank
➢ Outstanding cheques
➢ Unrecorded deposits
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5. Cash balance
▪ Add cash journals in CRJ & CPJ and post to
ledger.
6. Bank reconciliation statement
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R. ROBSON AND SON
Bank Reconciliation Statement
as at … 2010
Balance as per bank statement Cr (or Dr) $XXX

Add (or deduct) outstanding deposits XXX
XXX
Deduct (or add) unpresented cheques $XX
XX
XX XXX
Balance as per Cash at Bank account Dr (or Cr) $XXX
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Bank reconciliation: example
▪ Example:
▪ As at 1 July 2010, Willow’s Window Wash had $4830

cash in its bank account. The following information
relating to the firm’s cash transactions in July has
been provided below:
▪ Total cash receipts in July: 4700
▪ Total cash payments in July: 9050
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Bank Reconciliation example continued
STEP 1 Compare the cash journals to the bank statement
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Bank reconciliation example continued
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Bank reconciliation example continued
▪ STEP 2 Examine bank statement to see which items remain

unticked. They may be:
▪ bank fees
▪ taxes
▪ direct interest deposit
▪ STEP 3 Update the cash journals
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Updated cash receipt journal
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Updated cash payment journal
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Calculation of bank balance
STEP 4 Calculate cash balance
Add cash journals in CRJ & CPJ and post to ledger. Calculate
cash balance
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Bank reconciliation example
continued
▪ STEP 5 Bank reconciliation statement
▪ Check unticked items in the cash journals, list them in the

closing bank reconciliation
➢ Add: outstanding deposits

➢ Deduct: unpresented cheques
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Bank reconciliation statement
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Bank reconciliation statement
Cash balance per ledger:
+ Receipts reported on bank statement but not in ledger
(e.g. note receivable, direct deposit, interest)
– Bank charges
– NSF cheques
+ or – Bank errors
= Adjusted balance as per ledger account
(N.B.: All of the above need to be recorded in company’s records, i.e. journal entries.)
Balance as per bank statement:

+ Deposits in transit (outstanding deposit)
– Outstanding cheques
+ or – Bank errors
= Adjusted cash balance: bank
Holmes Institute
Control of cash
▪ Cash is the asset most subject to theft

▪ Need a good internal control system for
handling cash and recording cash
transactions
▪ 3 important principles
▪ Separation of responsibility for handling and
custodianship of cash from maintaining records
for cash which we call “segregation”.
▪ Banking intact each day’s cash receipts
▪ Making all payments by electronic transfer or
by cheque
Holmes Institute
Control of cash receipts
▪ Cash received through the mail

▪ Control relies heavily on separation of
record keeping and custodianship
▪ Cash receipts from cash sales
▪ Use of cash register
▪ Pre-numbered sales dockets
▪ Cash short and over (called unders &
overs)
▪ Cash shortage is recorded when daily
sales are recorded
Holmes Institute
Internal Control and cash receipts
Internal Control Cash receipts application
concepts examples
Clear responsibility Designated cashiers
Separation of recording and Handling cash, banking cash or

custodianship recording
receipts
Division of Mail clerk records receipts while

responsibility for supervised
related transactions
Mechanical and electronic Cash registers and EFTPOS equipment

devices
Physical control Use of a safe to store cash
Other Pre-numbered sales dockets and

receipt forms; all employees
take holiday
Holmes Institute
Internal Control and cash payments
Internal Control Cash receipts application
concepts examples
Clear responsibility Authorisation of payment
Separation of recording and Signing payment instruments

custodianship and recording
payments in accounting records
Division of Authorising payments and
responsibility for signing the cheques or making
related transactions electronic funds transfer
Mechanical and electronic Use of cheque printing machines
devices
Physical control Use of a safe to store unused
blank cheques
Other Sequentially pre-numbered
cheques; use of petty cash
system
Holmes Institute
Internal Control Cases
▪ Comment on the adequacy of internal control:
1. The cashier records the receipt of cash, banks it and

also keeps the ledger.
2. The office manager authorises the payments of salaries and
also prepares sales invoices
3. Our bookkeeper is very loyal and efficient. She handles all the
banking and the records and hasn’t even taken annual leave for
five years
Holmes Institute
1. Inappropriate – recording and custody not separated. The
cashier can ensure that the initial record matches the bank
deposit – it should be the other way around – and the
opportunity to pick up any discrepancy is lost because he/she
keeps the ledger
2. Inappropriate – recording custody and authorisation not

separated. The office manager can ensure that the record
matches the goods in the store. In addition, the usual way of
ensuring that items are issued only for bona fide reasons has
been lost.
Holmes Institute
2. There is no direct link between these two activities so there is

no breach of the rule about separation of duties. But the
company carries risk on business continuity in case the
bookkeeper suddenly decides to claim her leave and no
adequate training has been provided to another person.
Holmes Institute
Key takeaways
▪ We have examined how cash is managed, considering control

of cash, cash like similarities e.g. credit cards, EFTPOS, etc.
▪ Finally, we have examined some examples of situations where

inappropriate management puts organizations in precarious
positions with respect to potential loss of cash.
▪ Learn the three principles of management of cash, and the

trends in cash management. And, discuss how companies are
cash generators.
▪ Examined internal control and cash payments methods – how

cash is managed and protected.
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Key takeaways
▪ We have observed and now understand the cash receipts and

cash payment journals and how they interact with cash.
▪ We have examined the structure of a bank reconciliation and

how it occurs and seen how the issue is timing differences and
what party knew what first?
▪ Learned the processes that are used to reconcile the company’s

bank balance with the banks balance and what instruments are
normally outstanding.
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Key takeaways
▪ Examined a bank statement, understand how these

statements are developed and what they tell us and,
because of timing differences, do not tell us.
▪ We examined how best to use method of bank

reconciliation
▪ Learned that the aged trial balance of accounts

receivable should be updated.
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Next Lecture
▪ Next week, we will be looking at:
❑Lecture 9 - Non-current Assets

▪ What are non-current assets and their types
▪ Initial costs of non-current assets
▪ Depreciation
▪ Subsequent costs
▪ Derecognition of assets
▪ Intangible assets
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HA1020 Accounting Principles &

Lecture 8 Internal Control & Cash Management

• This session we look at how cash is managed,

▪ Cash is the asset most subject to theft

▪ Cash received through the mail

Separation of recording and custodianship Handling cash, banking cash or recording

Division of responsibility for Mail clerk records receipts while

Mechanical and electronic devices Cash registers and EFTPOS equipment

Physical control Use of a safe to store cash

Other Pre-numbered sales dockets and

Separation of recording and custodianship Signing payment instruments and recording

Division of responsibility for Authorising payments and signing the

Physical control Use of a safe to store unused blank cheques

Other Sequentially pre-numbered cheques;

▪ Comment on the adequacy of internal control:

2. Inappropriate – recording custody and authorisation not

2. There is no direct link between these two activities so there is

Adjusted cash balance as per the bank

Adjusted cash balance as per cash account in the company’s ledger.

• Compare the cash journals to bank

4. Items in the cash receipts/payments records

6. Bank reconciliation statement

Balance as per bank statement Cr (or Dr) $XXX

▪ As at 1 July 2010, Willow’s Window Wash had $4830

STEP 1 Compare the cash journals to the bank statement

▪ STEP 2 Examine bank statement to see which items remain

▪ STEP 3 Update the cash journals

▪ Check unticked items in the cash journals, list them in the

➢ Add: outstanding deposits

Balance as per bank statement:

▪ Cash is the asset most subject to theft

▪ Cash received through the mail

Separation of recording and Handling cash, banking cash or

Division of Mail clerk records receipts while

Mechanical and electronic Cash registers and EFTPOS equipment

Other Pre-numbered sales dockets and

Separation of recording and Signing payment instruments

▪ Comment on the adequacy of internal control:

1. The cashier records the receipt of cash, banks it and

2. Inappropriate – recording custody and authorisation not

2. There is no direct link between these two activities so there is

▪ We have examined how cash is managed, considering control

▪ Finally, we have examined some examples of situations where

▪ Learn the three principles of management of cash, and the

▪ Examined internal control and cash payments methods – how

▪ We have observed and now understand the cash receipts and

▪ We have examined the structure of a bank reconciliation and

▪ Learned the processes that are used to reconcile the company’s

▪ Examined a bank statement, understand how these

▪ We examined how best to use method of bank

▪ Learned that the aged trial balance of accounts

▪ Next week, we will be looking at:

❑Lecture 9 - Non-current Assets

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