Lecture 12

Accounting and Management

for Cash.
Learning objectives.
➢Internal Control System.
➢Nature of Cash.
➢Internal control procedure of cash.
➢Bank account & bank reconciliation.
➢Petty cash fund.
➢Cash Budgeting.
➢Cash Management.
 Lecturer References.
▪ Bamber, Best, Frasher, Harrision, Horngren
& Willett, Accounting, 3rd Edition, Chapter 7.
▪ Hoggett, Edwards & Medlin, Accounting, 6th
Edition, Chapter 10.
 Internal Control
➢ A key responsibility of a business’s
managers is to control operations.
➢Is the organisational plan and all the related
measures that an entity adopts to:
✓ safeguard assets against waste, fraud
and inefficiency;
✓encourage adherence to business
policies;
✓promote operational efficiency and
✓ensure accurate and reliable accounting
records.
 Internal Control (Cont’d).
▪ Administrative control established to provide
operational efficiency and adherence to
prescribed policies.
▪ Accounting control methods and procedures
used to protect assets and ensure the
reliability of accounting records.
Effective Internal Control System.
➢Competent, reliable and ethical personnel.
✓ Employees should be competent,
reliable and ethical.
➢Assigning of responsibilities.
✓ Each employee is assigned a certain
responsibility.
➢Proper authorisation.
✓ Written set of rules that outline approved
procedures.
Effective Internal Control (Cont’d)
➢Separation of duties.
✓Separation of operations from accounting.
✓Separation of custody of assets from
accounting.
✓Separation of authorisation of
transactions from the custody of related
assets.
✓Separation of duties within accounting
function.
Effective internal control system (Cont’d)

➢Internal and external audits.

✓Audit is an examination of a firm’s
financial statements and accounting
system, control and records that produced
them.
✓Auditors evaluate the firm’s system of
internal control.
✓Auditors spot weakness in the system and
recommend corrections.
✓Auditors can be internal or external
Effective internal control system (Cont’d)
➢Documents and records.
✓Documents should be prenumbered.
✓Prenumbering cash-sales receipts discourage
theft by cashiers.
✓Prenumbered missing documents can be easily
identified.
➢Electronic devices and computer controls.
✓Use electronic devices to help protect assets
and control operations. i.e. attach electronic
sensor to products.
✓Accounting systems relying more on digital
systems.
 Effective internal controls (cont’d)
➢ Other controls.
✓Burglar alarms.
✓ Fire proof vaults.
✓Point-of-sale terminals.
✓Property insurance.
✓Mandatory holidays and job rotation.
➢ Limitations of internal control.
✓Most internal control measures can be
circumvented or overcome.
✓Collusion between two or more employees to
defraud is inevitable.
✓Stringent internal control system may hurt.
 Nature of Cash.
✓Money represents anything that people
are willing to accept in payment for
goods and services or to pay off debts.
✓Cash is a liquid asset or narrow
money readily available to pay for
goods & and services or settle debts
that are due.
 Types of Cash

▪ Currency in circulation, i.e. Kina & toea.

– Cash held by entity (including petty cash)
– Inflow and out flow of cash in business
operation.
– Cash at bank account.
▪ Duplicates of credit card & EFTPOS sales.
▪ Negotiable instruments.
Cheque
Postal note
That a financial institution will accept.
 Nature of Cash (cont’d)
▪ Cash does not include:
– Accounts receivables.
– Bills receivables.
– Post dated cheques.
– IOUs or postage stamps. (which
represents prepaid postage expense)
 Effective control of Cash.
▪ Invest excess.
▪ Cash must be adequately controlled when
excess to and use of it.
▪ Proper internal control systems for cash
receipts and payments.
▪ Prepare cash budgets and plan investment
and borrowing opportunities.
▪ Prepare Cash flows – sources of cash and
application of cash.
 Principles of controlling cash.
1. Separation of responsibility for handling
and custodianship of cash.
2. Banking intact daily receipts.
3. Making all payment by cheque or
electronic transfers by bank account.
 Control of Cash (cont’d)
Cash Receipts.
Cash received through the post office.
✓Cash receipt from mail are based heavily on
separation of record keeping and
custodianship.
Cash receipt from cash sales.
➢Cash register – principle of separation of
recording keeping from custodianship.
➢Prenumbered sales dockets.
Cash Short and over.
➢Cash in drawer is more than record.
➢Cash in drawer is less than record.
Internal Control and Cash Receipts.
Internal Control Concepts Application
➢Clear responsibility ➢Designated cashiers.
➢Separation of record ➢Handling cash and
keeping and recording receipts.
custodianship
➢Division of responsibility ➢Mail clerks record
for related transactions. receipts while supervised.
➢Mechanical & electronic ➢Cash registers and
devices. EFTPOS equipment.
➢Physical Control. ➢Use of safe for
temporary cash storage.
 Control of Cash
➢Cash Payment.
✓Payment for cash purchases.
✓Paying suppliers for goods and services.
✓Loan repayments.
✓Purchase of fixed-assets.
✓Withdrawals by owners
✓Other expenses.
 Control of Cash
➢Cash Payment (cont’d)
✓ Approval of invoices for payment.
✓Signing of cheques (by two or more people) and
approval of electronic transfers.
✓Two key elements of effective control of cash
payment are:
- Use of cheque payment for larger amount.
- Use of petty cash fund for small cash
payments.
 Internal control and cash payment
Internal control concepts Application
➢Clear lines of ➢Authorisation of
responsibility. payment.
➢Separation of record ➢Signing cheques and
keeping and recording payments.
custodianship. ➢Authorization of
➢Division of payment and signing of
responsibility. cheque.
➢Mechanical and ➢Cheque printing
electronic devices. machines to prevent
➢Physical controls changes.
➢Use safe to store blank
cheques.
 Bank Accounts and Reconciliation

➢Because banks have established practices

of safeguarding cash.
➢Procedures to control bank account include;
✓Cheque Accounts
* Signature card.
* Deposit slip.
✓Electronic Fund transfer.
✓Bank statement.
 Bank Reconciliation
➢ A statement prepared to reconcile the balance
reported on the bank statement with the bank
balance as shown in the entity’s records
➢ There are two records of business cash:
✓Firm’s Cash at bank account.
✓Bank statement.
➢ The cash at bank account & bank statement may
show different amount.
➢ Accountants must therefore explain all differences
exist at a particular date.
➢ Monthly bank reconciliations are highly
recommended for better internal control system.
 Common items that cause differences.
➢Items recorded by business but not yet
recorded by bank.
✓Deposit in transit (outstanding deposits)
✓Outstanding (unpresented) cheque.
➢Items recorded by bank but not yet recorded
by business.
✓Direct deposits.
✓Electronic fund transfers.
✓Interest revenue.
✓Charges for dishonoured cheques.
✓Errors by either the business or bank.
 Bank reconciliation procedures.
➢Last bank reconciliation statement.
➢Cash receipt and cash payment journals for
the period.
➢Cash at bank ledger account.
➢Bank statement for the period since the last
reconciliation.
➢Check that all items from previous
reconciliation are cleared.
➢Compare the bank statement Drs to cash
payment records.
 Bank reconciliation procedure (cont’d)

➢Compare bank statement Crs to cash receipts

records and mark off common items.
➢Update Cash records:
✓Unmarked Dr items on the b/s.
- Cash payment journal
✓Unmarked Cr items on the b/s.
- cash receipt journal.

All items on the bank statement should now be

marked off.
 Reconciliation Procedure (cont’d)

➢Items in the cash receipts/payments

records remaining unmarked indicate
transactions not recorded by bank.
✓ Outstanding (unpresented cheques)
✓Unrecorded deposits.
 Bank reconciliation.
R. Robson & Son
Bank Reconciliation Statement
as at 30 June 2009
Balance as per bank statement Cr (Dr) Kxxx
Add (or deduct) outstanding deposits xxx
xxx
Deduct (add) unpresented cheques
xx
xx xxx
Balance as per cash at bank a/c Kxxx
 Bank Statement
Date Particulars Debit Credit Balance
1/06/07 Bal. brought forward 7 200 Cr
2/06/07 Bank charges 6 7 194 Cr
6/06/07 C/C 400 7 594 Cr
7/06/07 Interest on bonds 25 7 619 Cr
9/06/07 2472 90 7 529 Cr
16/06/07 C/C 395 7 924 Cr
18/06/07 2474 75 7 849 Cr
19/06/07 C/C 250 8 099 Cr
26/06/07 C/C 40
Dishonoured Cheque 60 8 079 Cr
29/06/07 2475 135 7 944 Cr
30/06/07 C/C 190 8 134 Cr
 Cash receipts Journal
Date Account Cash at Bank
5/06/07 Sales 400
15/06/07 Pita Kes 395
18/06/07 Sales 250
25/06/07 Commission 40
29/06/07 J. Dom 190
30/06/07 Sales 500
Interest on bonds 25
Dishonoured cheque (60)
1 740
 Cash Payment Journal
Date Chq. No. Account Bank

6/06/07 2472 T. Bag 90

12/06/0 2473 Purchase 150
7 2474 Stationery 75
15/06/0 2475 K. Kulung 153
7 2476 Purchases 200
24/06/0 Adjustment of error (18)
7
Bank Charges 6
30/06/0
7 K656
 Cash at Bank
1/06/07 Bal. 7 200 31/07/09 CP 656
31/07/09 CR 1 740 Bal. c/d 8 284
8 940 8 940
1/08/09 Bal. b/d 8 284

Bank Reconciliation Statement

as at 31 July 2009
Balance as per bank statement K8 134 Cr
Add: outstanding deposit 500
8 634
Less: Unpresented cheques
2473 150
2476 200 350
Balance as per cash at bank account. K 8 284
 Petty Cash fund
➢ A specified amount of cash placed under
the control of an employee (petty cashier)
for use in making small cash payments.
➢ Establishing the fund.
Jan 2 Petty Cash 100
Cash at Bank 100

➢ Making Payment from the fund.

✓ Petty Cash Voucher or Receipt Shows;
• amount Paid.
• purpose of the payment.
• date of the payment.
 PETTY CASH FUND (Cont’d)
➢Reimbursing the fund.
✓Replenish fund periodically by writing a
cheque equal to the amount of the sum of the
vouchers in the fund.
✓Cheque is cashed by the cashier and kept in
petty cash box.
✓Various expenses are debited as indicated by
the petty cash vouchers.
Jan 31 Vehicle expense 15.22
Office Expense 12.30
Postage Expense 56.47
GST Outlays 8.40
Cash at Bank 92.39
 PETTY CASH FUND (Cont’d)
➢Cash Payments Journal.

Date Acc Dr Chq. Debits Credits

No.
Ac. Pble GST Other Bank Disc.
rec.
Jan 31. Vehicle exp 1.53 15.20
Office exp 1.23 12.30
Postage exp 5.65 56.47 92.39

➢Process of reimbursing a petty cash fund;]

✓ determine fixed sum.
✓cash remaining together with total of vouches
of cash spend equals the imprest amount.
✓reimbursement is always the amount spend.
 Cash Budgeting
➢Is a projection of anticipated future cash
receipts and cash payments.
➢Non-cash items excluded.
➢Will ensure;
✓Entity can meet commitments and
maintain credit standing.
✓Assessment of expenditure.
✓Borrowings (and interest) minimised.
✓Surplus funds utilised.
 Preparation of Cash Budgeting.

➢Prepare a schedule of estimated cash

collections from credit sales.
➢Prepare a schedule of estimated cash
payments for credit purchase.
➢Prepare schedule for estimated GST
collections and Outlay.
➢Prepare the cash budget.
 Kamkumung Enterprise.
Cash Budget
for two months ending 31 December 2009

November December
Cash in the beginning of the month K 800 K6 614
Expected cash collections from sales;
Cash 36 300 38 500
Credit 34 320 36 080
Total Cash from Credit sales 70 620 74 580
Total Cash available K 71420 K81 194
Expected cash payments;
Purchases K 36 652 K38 808
Wages 16 000 16 000
Rent 4 620 4 620
Advertising 3 300 4 400
Purchases of printer 900
GST to ATO 2 344 2 258
J. Kama drawings 900 900
Total Expected payments. 64 806 66 986
Cash at end of month. K6 614 K14 208
 Principles of Cash Management
➢Reduce collection time for accounts
receivables.
➢Postpone payments to accounts payables.
➢Keep inventory levels to a minimum.
➢Invest surplus cash
➢Plan for capital expenditure