Accounting Principles - Internal Control And Cash
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Chapter 8-1
CHAPTER 8
INTERNAL CONTROL AND CASH Accounting Principles, Eighth Edition Chapter 8-2
Study Objectives 1.
Define internal control.
2. Identify the principles of internal control. 3. Explain the applications of internal control principles to cash receipts. 4. Explain the applications of internal control principles to cash disbursements. 5. Describe the operation of a petty cash fund. 6. Indicate the control features of a bank account. 7. Prepare a bank reconciliation. 8. Explain the reporting of cash. Chapter 8-3
Internal Control and Cash
Internal Control The SarbanesSarbanesOxley Act Principles Limitations
Chapter 8-4
Cash Controls Control over cash receipts Control over cash disbursements
Use of a Bank
Making deposits Writing checks Bank statements Reconciling the bank account
Reporting Cash Cash equivalents Restricted cash Compensating balances
Internal Control Methods and measures adopted to: 1. Safeguard assets. 2. Enhance accuracy and reliability of accounting records. Reduce risk of: a. Errors (unintentional) b. Irregularities (intentional) Under the Sarbanes-Oxley Act, all publicly traded U.S. corporations are required to maintain an adequate system of internal control. Chapter 8-5
LO 1 Define internal control.
Internal Control
The SarbanesSarbanes-Oxley Act Companies must develop principles of control over financial reporting. continually verify that controls are working. Independent auditors must attest to the level of internal control. SOX created the Public Company Accounting Oversight Board (PCAOB). Chapter 8-6
LO 1 Define internal control.
Internal Control
Principles of Internal Control
Illustration 8-1
Measures vary with size and nature of the business. management’s control philosophy.
Chapter 8-7
LO 2 Identify the principles of internal control.
Internal Control
Principles of Internal Control ESTABLISHMENT OF RESPONSIBILITY Control is most effective when only one person is responsible for a given task.
SEGREGATON OF DUTIES Related duties, including physical custody and record keeping, should be assigned to different individuals.
DOCUMENTATION PROCEDURES Companies should use prenumbered documents for all documents should be accounted for. Chapter 8-8
LO 2 Identify the principles of internal control.
Internal Control
Principles of Internal Control
Illustration 8-3
PHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS
Physical
Mechanical and Electronic Chapter 8-9
LO 2 Identify the principles of internal control.
Internal Control
Principles of Internal Control INDEPENDENT INTERNAL VERIFICATION 1. Records periodically verified by an employee who is independent. 2. Discrepancies reported to management.
OTHER CONTROLS 1. Bond employees. 2. Rotate employees’ duties and require vacations. 3. Conduct background checks. Chapter 8-10
LO 2 Identify the principles of internal control.
Internal Control
Limitations of Internal Control Costs should not exceed benefit. Human element. Size of the business.
Chapter 8-11
LO 2 Identify the principles of internal control.
Cash Controls
Internal Control over Cash Receipts Establishment of Responsibility Only designated personnel are authorized to handle cash receipts (cashiers)
Documentation Procedures Use remittance advice (mail receipts), cash register tapes, and deposit slips
Independent Internal Verification Supervisors count cash receipts daily; treasurer compares total receipts to bank deposits daily
Segregation of Duties Different individuals receive cash, record cash receipts, and hold the cash
Physical, Mechanical, and Electronic Controls Store cash in safes and bank vaults; limit access to storage areas; use cash registers
Other Controls Bond personnel who handle cash; require employees to take vacations; deposit all cash in bank daily
Illustration 8-5 Chapter 8-12
LO 3 Explain the applications of internal control principles to cash receipts.
Cash Controls
Discussion Question Q8-3. At the corner grocery store, all sales clerks make change out of one cash register drawer. Is this a violation of internal control? Why?
See notes page for discussion Chapter 8-13
LO 3 Explain the applications of internal control principles to cash receipts.
Cash Controls Cash consists of coins, currency, checks, money orders, and money on hand or on deposit in a bank. Cash receipts come from: cash sales collections on account from customers receipt of interest, rent, and dividends investments by owners bank loans proceeds from the sale of noncurrent assets Chapter 8-14
LO 3 Explain the applications of internal control principles to cash receipts.
Cash Controls
Discussion Question Q8-8. The management of Sewell Company asks you, as the company accountant, to explain (a) the concept of reasonable assurance in internal control and (b) the importance of the human factor in internal control.
See notes page for discussion Chapter 8-15
LO 3 Explain the applications of internal control principles to cash receipts.
Cashier’s Department
OverOver -the the-Counter Receipts Sales Department Illustration 8-7
Prepare daily summary Prepare deposit slip Cashier ring up sales Supervisor 1. reads register totals 2. makes cash counts 3. prepares cash count sheets Chapter 8-16
Bank
Treasurer Accounting
(deposit) (verification) (record) LO 3 Explain the applications of internal control principles to cash receipts.
Mail Receipts Control Procedures: Mail receipts should be opened by two people, a list prepared, and each check endorsed. Copy of the list, along with the checks and remittance advices, sent to cashier’s department. Cashier adds the checks to the over-the-counter receipts and prepares a daily cash summary and makes the daily bank deposit. Copy of list sent to treasurer’s office for comparison with total shown on daily cash summary. Chapter 8-17
LO 3 Explain the applications of internal control principles to cash receipts.
Cash Controls
Review Question Permitting only designated personnel to handle cash receipts is an application of the principle of: a. segregation of duties. b. establishment of responsibility. c. independent check. d. other controls. Chapter 8-18
LO 3 Explain the applications of internal control principles to cash receipts.
Cash Controls
Internal Control over Cash Disbursements Generally, internal control over cash disbursements is more effective when companies pay by check, rather than by cash. Applications: Voucher system Electronic funds transfers (EFT) system Petty cash fund Chapter 8-19
LO 4 Explain the applications of internal control principles to cash disbursements.
Cash Controls
Internal Control over Cash Disbursements Establishment of Responsibility Only designated personnel are authorized to sign checks (treasurer) Segregation of Duties Different individuals approve and make payments; check signers do not record disbursements
Documentation Procedures Use prenumbered checks and account for them in sequence; each check must have an approved invoice Other Controls Stamp invoices PAID
Independent Internal Verification Compare checks to invoices; reconcile bank statement monthly Physical, Mechanical, and Electronic Controls Store blank checks in safes, with limited access; print check amounts by machine in indelible ink
Illustration 8-8 Chapter 8-20
LO 4 Explain the applications of internal control principles to cash disbursements.
Cash Controls
Discussion Question Q8-14. Joe Griswold Company’s internal controls over cash disbursements provide for the treasurer to sign checks imprinted by a checkwriting machine in indelible ink after comparing the check with the approved invoice. Identify the internal control principles that are present in these controls. See notes page for discussion Chapter 8-21
LO 4 Explain the applications of internal control principles to cash disbursements.
Cash Controls
Review Question The use of prenumbered checks in disbursing cash is an application of the principle of: a. establishment of responsibility. b. segregation of duties. c. physical, mechanical, and electronic controls. d. documentation procedures.
Chapter 8-22
LO 4 Explain the applications of internal control principles to cash disbursements.
Cash Controls
Internal Control over Cash Disbursements Voucher System Network of approvals, by authorized individuals, to ensure all disbursements by check are proper. A voucher is an authorization form prepared for each expenditure.
Chapter 8-23
LO 4 Explain the applications of internal control principles to cash disbursements.
Cash Controls
Internal Control over Cash Disbursements Electronic Funds Transfers (EFT) Disbursement systems that uses wire, telephone, or computers to transfer cash balances between locations.
Chapter 8-24
LO 4 Explain the applications of internal control principles to cash disbursements.
Cash Controls
Internal Control over Cash Disbursements Petty Cash Fund - Used to pay small amounts. Involves: 1. establishing the fund, 2. making payments from the fund, and 3. replenishing the fund.
Chapter 8-25
LO 5 Describe the operation of a petty cash fund.
Cash Controls E8-8 Lincolnville Company uses an imprest petty cash system. The fund was established on March 1 with a balance of $100. During March the following petty cash receipts were found in the petty cash box. March 5
Stamp inventory
March 7
Freight-out
March 9
Miscellaneous expense
March 11
Travel expense
March 14
Miscellaneous expense
$39 21 6 24 5
The fund was replenished on March 15 when the fund contained $3 in cash. On March 20, the amount in the fund was increased to $150. Instructions: Journalize the entries in March that pertain to the operation of the petty cash fund. Chapter 8-26
LO 5 Describe the operation of a petty cash fund.
Cash Controls E8-8 The fund was established on March 1 with a E8balance of $100. March 1
Chapter 8-27
Petty cash Cash
100 100
LO 5 Describe the operation of a petty cash fund.
Cash Controls E8-8 The fund was replenished on March 15 when the E8fund contained $3 in cash. March 15
Chapter 8-28
Postage expense
39
Freight-out
21
Miscellaneous expense Travel expense Cash over and short Cash
11 24 2 97
LO 5 Describe the operation of a petty cash fund.
Cash Controls E8-8 On March 20, the amount in the fund was E8increased to $150. March 20
Chapter 8-29
Petty cash Cash
50 50
LO 5 Describe the operation of a petty cash fund.
Use of a Bank Contributes to good internal control over cash. Minimizes the amount of currency on hand. Creates a double record of bank transactions. Bank reconciliation.
Chapter 8-30
LO 6 Indicate the control features of a bank account.
Use of a Bank Making Bank Deposits Authorized employee should make deposit.
Front Side Chapter 8-31
Illustration 8-10
Bank Code Numbers
Reverse Side LO 6 Indicate the control features of a bank account.
Use of a Bank Writing Checks
Illustration 8-11
Written order signed by depositor directing bank to pay a specified sum of money to a designated recipient. Maker Payee Payer
Chapter 8-32
LO 6 Indicate the control features of a bank account.
Use of a Bank Bank Statements
Illustration 8-12
Debit Memorandum Bank service charge NSF (not sufficient funds)
Credit Memorandum Collect notes receivable. Interest earned. Chapter 8-33
LO 6 Indicate the control features of a bank account.
Use of a Bank
Review Question The control features of a bank account do not include: a. having bank auditors verify the correctness of the bank balance per books. b. minimizing the amount of cash that must be kept on hand. c. providing a double record of all bank transactions. d. safeguarding cash by using a bank as a depository. Chapter 8-34
LO 6 Indicate the control features of a bank account.
Use of a Bank Reconciling the Bank Account Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances. Reconciling Items: 1. Deposits in transit. 2. Outstanding checks. 3. Errors. 4. Bank memoranda. Chapter 8-35
LO 7 Prepare a bank reconciliation.
Use of a Bank Reconciliation Procedures Illustration 8-13
+ Deposit in Transit
+ Notes collected by bank
-
-
NSF (bounced) checks
-
Check printing or other service charges
Outstanding Checks
+- Bank Errors
+- Book Errors CORRECT BALANCE Chapter 8-36
CORRECT BALANCE LO 7 Prepare a bank reconciliation.
Use of a Bank E8E8 -11 The following information pertains to Family Video Company. 1.
Cash balance per bank, July 31, $7,263.
2.
Cash balance per books, July 31, $7,284.
3.
July bank service charge not recorded by the depositor $28.
4.
Deposits in transit, July 31, $1,500.
5.
Bank collected $900 note for Family in July, plus interest $36, less fee $20.The collection has not been recorded by Family, and no interest has been accrued.
6.
Outstanding checks, July 31, $591.
Instructions a) Prepare a bank reconciliation at July 31. b) Journalize the adjusting entries at July 31 on the books of Family Video Company. Chapter 8-37
LO 7 Prepare a bank reconciliation.
Use of a Bank E8E8 -11 a) Prepare a bank reconciliation at July 31. Cash balance per bank statement Add:
Deposit in transit
Less: Outstanding checks Adjusted cash balance per bank
(591) $8,172
Cash balance per books
$7,284 900
Add: Less:
Collection of notes receivable Collection of interest
36
Bank service charge
(28)
Note collection fee
(20)
Adjusted cash balance per books Chapter 8-38
$7,263 1,500
$8,172 LO 7 Prepare a bank reconciliation.
Use of a Bank E8-11 b) Journalize the adjusting entries at July 31 on E8the books of Family Video Company. Dr. Cr. July 31 Miscellaneous expense 28 July 31
Cash
Cash
916
Miscellaneous expense Interest revenue Notes receivable
28
20 36 900
Note: Adjusting journal entry includes only the adjustments to the cash balance per books. Chapter 8-39
LO 7 Prepare a bank reconciliation.
Use of a Bank
Review Question The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is: a. outstanding checks. b. deposit in transit. c. a bank error. d. bank service charges.
Chapter 8-40
LO 7 Prepare a bank reconciliation.
Use of a Bank
Review Question Which of the following statements correctly describes the reporting of cash? a. Cash cannot be combined with cash equivalents. b. Restricted cash funds may be combined with Cash. c. Cash is listed first in the current assets section. d. Restricted cash funds cannot be reported as a current asset. Chapter 8-41
LO 7 Prepare a bank reconciliation.
Recording Process
Discussion Question Q8-20. Lori Figgs is confused about the lack of agreement between the cash balance per books and the balance per the bank. Explain the causes for the lack of agreement to Lori, and give an example of each cause.
See notes page for discussion
Chapter 8-42
LO 7 Prepare a bank reconciliation.
Reporting Cash Most liquid asset, listed first in current assets section of balance sheet. Illustration 8-16
Cash equivalents Restricted cash Compensating balances Chapter 8-43
LO 8 Explain the reporting of cash.
Copyright “Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”
Chapter 8-44
CHAPTER 8
INTERNAL CONTROL AND CASH Accounting Principles, Eighth Edition Chapter 8-2
Study Objectives 1.
Define internal control.
2. Identify the principles of internal control. 3. Explain the applications of internal control principles to cash receipts. 4. Explain the applications of internal control principles to cash disbursements. 5. Describe the operation of a petty cash fund. 6. Indicate the control features of a bank account. 7. Prepare a bank reconciliation. 8. Explain the reporting of cash. Chapter 8-3
Internal Control and Cash
Internal Control The SarbanesSarbanesOxley Act Principles Limitations
Chapter 8-4
Cash Controls Control over cash receipts Control over cash disbursements
Use of a Bank
Making deposits Writing checks Bank statements Reconciling the bank account
Reporting Cash Cash equivalents Restricted cash Compensating balances
Internal Control Methods and measures adopted to: 1. Safeguard assets. 2. Enhance accuracy and reliability of accounting records. Reduce risk of: a. Errors (unintentional) b. Irregularities (intentional) Under the Sarbanes-Oxley Act, all publicly traded U.S. corporations are required to maintain an adequate system of internal control. Chapter 8-5
LO 1 Define internal control.
Internal Control
The SarbanesSarbanes-Oxley Act Companies must develop principles of control over financial reporting. continually verify that controls are working. Independent auditors must attest to the level of internal control. SOX created the Public Company Accounting Oversight Board (PCAOB). Chapter 8-6
LO 1 Define internal control.
Internal Control
Principles of Internal Control
Illustration 8-1
Measures vary with size and nature of the business. management’s control philosophy.
Chapter 8-7
LO 2 Identify the principles of internal control.
Internal Control
Principles of Internal Control ESTABLISHMENT OF RESPONSIBILITY Control is most effective when only one person is responsible for a given task.
SEGREGATON OF DUTIES Related duties, including physical custody and record keeping, should be assigned to different individuals.
DOCUMENTATION PROCEDURES Companies should use prenumbered documents for all documents should be accounted for. Chapter 8-8
LO 2 Identify the principles of internal control.
Internal Control
Principles of Internal Control
Illustration 8-3
PHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS
Physical
Mechanical and Electronic Chapter 8-9
LO 2 Identify the principles of internal control.
Internal Control
Principles of Internal Control INDEPENDENT INTERNAL VERIFICATION 1. Records periodically verified by an employee who is independent. 2. Discrepancies reported to management.
OTHER CONTROLS 1. Bond employees. 2. Rotate employees’ duties and require vacations. 3. Conduct background checks. Chapter 8-10
LO 2 Identify the principles of internal control.
Internal Control
Limitations of Internal Control Costs should not exceed benefit. Human element. Size of the business.
Chapter 8-11
LO 2 Identify the principles of internal control.
Cash Controls
Internal Control over Cash Receipts Establishment of Responsibility Only designated personnel are authorized to handle cash receipts (cashiers)
Documentation Procedures Use remittance advice (mail receipts), cash register tapes, and deposit slips
Independent Internal Verification Supervisors count cash receipts daily; treasurer compares total receipts to bank deposits daily
Segregation of Duties Different individuals receive cash, record cash receipts, and hold the cash
Physical, Mechanical, and Electronic Controls Store cash in safes and bank vaults; limit access to storage areas; use cash registers
Other Controls Bond personnel who handle cash; require employees to take vacations; deposit all cash in bank daily
Illustration 8-5 Chapter 8-12
LO 3 Explain the applications of internal control principles to cash receipts.
Cash Controls
Discussion Question Q8-3. At the corner grocery store, all sales clerks make change out of one cash register drawer. Is this a violation of internal control? Why?
See notes page for discussion Chapter 8-13
LO 3 Explain the applications of internal control principles to cash receipts.
Cash Controls Cash consists of coins, currency, checks, money orders, and money on hand or on deposit in a bank. Cash receipts come from: cash sales collections on account from customers receipt of interest, rent, and dividends investments by owners bank loans proceeds from the sale of noncurrent assets Chapter 8-14
LO 3 Explain the applications of internal control principles to cash receipts.
Cash Controls
Discussion Question Q8-8. The management of Sewell Company asks you, as the company accountant, to explain (a) the concept of reasonable assurance in internal control and (b) the importance of the human factor in internal control.
See notes page for discussion Chapter 8-15
LO 3 Explain the applications of internal control principles to cash receipts.
Cashier’s Department
OverOver -the the-Counter Receipts Sales Department Illustration 8-7
Prepare daily summary Prepare deposit slip Cashier ring up sales Supervisor 1. reads register totals 2. makes cash counts 3. prepares cash count sheets Chapter 8-16
Bank
Treasurer Accounting
(deposit) (verification) (record) LO 3 Explain the applications of internal control principles to cash receipts.
Mail Receipts Control Procedures: Mail receipts should be opened by two people, a list prepared, and each check endorsed. Copy of the list, along with the checks and remittance advices, sent to cashier’s department. Cashier adds the checks to the over-the-counter receipts and prepares a daily cash summary and makes the daily bank deposit. Copy of list sent to treasurer’s office for comparison with total shown on daily cash summary. Chapter 8-17
LO 3 Explain the applications of internal control principles to cash receipts.
Cash Controls
Review Question Permitting only designated personnel to handle cash receipts is an application of the principle of: a. segregation of duties. b. establishment of responsibility. c. independent check. d. other controls. Chapter 8-18
LO 3 Explain the applications of internal control principles to cash receipts.
Cash Controls
Internal Control over Cash Disbursements Generally, internal control over cash disbursements is more effective when companies pay by check, rather than by cash. Applications: Voucher system Electronic funds transfers (EFT) system Petty cash fund Chapter 8-19
LO 4 Explain the applications of internal control principles to cash disbursements.
Cash Controls
Internal Control over Cash Disbursements Establishment of Responsibility Only designated personnel are authorized to sign checks (treasurer) Segregation of Duties Different individuals approve and make payments; check signers do not record disbursements
Documentation Procedures Use prenumbered checks and account for them in sequence; each check must have an approved invoice Other Controls Stamp invoices PAID
Independent Internal Verification Compare checks to invoices; reconcile bank statement monthly Physical, Mechanical, and Electronic Controls Store blank checks in safes, with limited access; print check amounts by machine in indelible ink
Illustration 8-8 Chapter 8-20
LO 4 Explain the applications of internal control principles to cash disbursements.
Cash Controls
Discussion Question Q8-14. Joe Griswold Company’s internal controls over cash disbursements provide for the treasurer to sign checks imprinted by a checkwriting machine in indelible ink after comparing the check with the approved invoice. Identify the internal control principles that are present in these controls. See notes page for discussion Chapter 8-21
LO 4 Explain the applications of internal control principles to cash disbursements.
Cash Controls
Review Question The use of prenumbered checks in disbursing cash is an application of the principle of: a. establishment of responsibility. b. segregation of duties. c. physical, mechanical, and electronic controls. d. documentation procedures.
Chapter 8-22
LO 4 Explain the applications of internal control principles to cash disbursements.
Cash Controls
Internal Control over Cash Disbursements Voucher System Network of approvals, by authorized individuals, to ensure all disbursements by check are proper. A voucher is an authorization form prepared for each expenditure.
Chapter 8-23
LO 4 Explain the applications of internal control principles to cash disbursements.
Cash Controls
Internal Control over Cash Disbursements Electronic Funds Transfers (EFT) Disbursement systems that uses wire, telephone, or computers to transfer cash balances between locations.
Chapter 8-24
LO 4 Explain the applications of internal control principles to cash disbursements.
Cash Controls
Internal Control over Cash Disbursements Petty Cash Fund - Used to pay small amounts. Involves: 1. establishing the fund, 2. making payments from the fund, and 3. replenishing the fund.
Chapter 8-25
LO 5 Describe the operation of a petty cash fund.
Cash Controls E8-8 Lincolnville Company uses an imprest petty cash system. The fund was established on March 1 with a balance of $100. During March the following petty cash receipts were found in the petty cash box. March 5
Stamp inventory
March 7
Freight-out
March 9
Miscellaneous expense
March 11
Travel expense
March 14
Miscellaneous expense
$39 21 6 24 5
The fund was replenished on March 15 when the fund contained $3 in cash. On March 20, the amount in the fund was increased to $150. Instructions: Journalize the entries in March that pertain to the operation of the petty cash fund. Chapter 8-26
LO 5 Describe the operation of a petty cash fund.
Cash Controls E8-8 The fund was established on March 1 with a E8balance of $100. March 1
Chapter 8-27
Petty cash Cash
100 100
LO 5 Describe the operation of a petty cash fund.
Cash Controls E8-8 The fund was replenished on March 15 when the E8fund contained $3 in cash. March 15
Chapter 8-28
Postage expense
39
Freight-out
21
Miscellaneous expense Travel expense Cash over and short Cash
11 24 2 97
LO 5 Describe the operation of a petty cash fund.
Cash Controls E8-8 On March 20, the amount in the fund was E8increased to $150. March 20
Chapter 8-29
Petty cash Cash
50 50
LO 5 Describe the operation of a petty cash fund.
Use of a Bank Contributes to good internal control over cash. Minimizes the amount of currency on hand. Creates a double record of bank transactions. Bank reconciliation.
Chapter 8-30
LO 6 Indicate the control features of a bank account.
Use of a Bank Making Bank Deposits Authorized employee should make deposit.
Front Side Chapter 8-31
Illustration 8-10
Bank Code Numbers
Reverse Side LO 6 Indicate the control features of a bank account.
Use of a Bank Writing Checks
Illustration 8-11
Written order signed by depositor directing bank to pay a specified sum of money to a designated recipient. Maker Payee Payer
Chapter 8-32
LO 6 Indicate the control features of a bank account.
Use of a Bank Bank Statements
Illustration 8-12
Debit Memorandum Bank service charge NSF (not sufficient funds)
Credit Memorandum Collect notes receivable. Interest earned. Chapter 8-33
LO 6 Indicate the control features of a bank account.
Use of a Bank
Review Question The control features of a bank account do not include: a. having bank auditors verify the correctness of the bank balance per books. b. minimizing the amount of cash that must be kept on hand. c. providing a double record of all bank transactions. d. safeguarding cash by using a bank as a depository. Chapter 8-34
LO 6 Indicate the control features of a bank account.
Use of a Bank Reconciling the Bank Account Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances. Reconciling Items: 1. Deposits in transit. 2. Outstanding checks. 3. Errors. 4. Bank memoranda. Chapter 8-35
LO 7 Prepare a bank reconciliation.
Use of a Bank Reconciliation Procedures Illustration 8-13
+ Deposit in Transit
+ Notes collected by bank
-
-
NSF (bounced) checks
-
Check printing or other service charges
Outstanding Checks
+- Bank Errors
+- Book Errors CORRECT BALANCE Chapter 8-36
CORRECT BALANCE LO 7 Prepare a bank reconciliation.
Use of a Bank E8E8 -11 The following information pertains to Family Video Company. 1.
Cash balance per bank, July 31, $7,263.
2.
Cash balance per books, July 31, $7,284.
3.
July bank service charge not recorded by the depositor $28.
4.
Deposits in transit, July 31, $1,500.
5.
Bank collected $900 note for Family in July, plus interest $36, less fee $20.The collection has not been recorded by Family, and no interest has been accrued.
6.
Outstanding checks, July 31, $591.
Instructions a) Prepare a bank reconciliation at July 31. b) Journalize the adjusting entries at July 31 on the books of Family Video Company. Chapter 8-37
LO 7 Prepare a bank reconciliation.
Use of a Bank E8E8 -11 a) Prepare a bank reconciliation at July 31. Cash balance per bank statement Add:
Deposit in transit
Less: Outstanding checks Adjusted cash balance per bank
(591) $8,172
Cash balance per books
$7,284 900
Add: Less:
Collection of notes receivable Collection of interest
36
Bank service charge
(28)
Note collection fee
(20)
Adjusted cash balance per books Chapter 8-38
$7,263 1,500
$8,172 LO 7 Prepare a bank reconciliation.
Use of a Bank E8-11 b) Journalize the adjusting entries at July 31 on E8the books of Family Video Company. Dr. Cr. July 31 Miscellaneous expense 28 July 31
Cash
Cash
916
Miscellaneous expense Interest revenue Notes receivable
28
20 36 900
Note: Adjusting journal entry includes only the adjustments to the cash balance per books. Chapter 8-39
LO 7 Prepare a bank reconciliation.
Use of a Bank
Review Question The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is: a. outstanding checks. b. deposit in transit. c. a bank error. d. bank service charges.
Chapter 8-40
LO 7 Prepare a bank reconciliation.
Use of a Bank
Review Question Which of the following statements correctly describes the reporting of cash? a. Cash cannot be combined with cash equivalents. b. Restricted cash funds may be combined with Cash. c. Cash is listed first in the current assets section. d. Restricted cash funds cannot be reported as a current asset. Chapter 8-41
LO 7 Prepare a bank reconciliation.
Recording Process
Discussion Question Q8-20. Lori Figgs is confused about the lack of agreement between the cash balance per books and the balance per the bank. Explain the causes for the lack of agreement to Lori, and give an example of each cause.
See notes page for discussion
Chapter 8-42
LO 7 Prepare a bank reconciliation.
Reporting Cash Most liquid asset, listed first in current assets section of balance sheet. Illustration 8-16
Cash equivalents Restricted cash Compensating balances Chapter 8-43
LO 8 Explain the reporting of cash.
Copyright “Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”
Chapter 8-44
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