INTERNAL CONTROL

Principles of Internal Control safeguards to ensure process is controlled

Establishment of Responsibility - control is most effective when only one
person is responsible for a given task.
Segregation of Duties - different individuals should be responsible for
different activities
- the responsibility for record keeping of an asset should be separate from
physical custody
(Authorization, Recording, Custody)
Documentation Procedures use of pre-numbered documents whenever
possible and all documents should be accounted for
- prompt forwarding of source documents to the accounting department

CASH DISBURSEMENT CONTROL

- how you pay/disburse cash
- generally, internal control over cash disbursements is more effective when
companies pay by check or electronic funds transfer (EFT) rather than by cash
- one exception is payments for incidental amounts that are paid out of petty cash
Voucher System is a network of approvals by authorized individuals,
acting independently to ensure that all disbursements by check are proper.
- VOUCHER is an authorization form prepared for each expenditure
- there is VERIFICATION (legitimate purchase of the business) -> undergo
process of APPROVAL & VERIFICATION
2 journal entries are prepared
+ an entry to record the liability when the voucher is issued
+ an entry to record the payment (check) of the liability related to the
voucher
Electronic Funds Transfer (EFT) disbursement systems that uses wire,
telephone, or computers to transfer cash balances between locations
Other Controls stamp invoices (paid)

IMPREST SYSTEM
- a system of control of cash which requires that:
- cash receipts are deposited intact daily
- all significant disbursements shall be made through issuance of checks
- small payments should be made through the petty cash fund

PETTY CASH FUND

- is a small amount of current from which small payments are made
- a petty cash custodian is designated to handle the petty cash fund
Methods of Handling Petty Cash Imprest Fund System and Fluctuating Fund
System

IMPREST FUND SYSTEM

- petty cash is maintained at a fixed amount
- payments are supported by petty cash vouchers &r recorded through MEMO
entries in the petty cash book
- the fund is REPLENISHED when it is exhausted or when the remaining balance is
not enough to meet the average requirements for the day
* replenishment is equal to amount of expenses incurred
* replenishment check is issued to petty cash custodian
- Involves 3 phases: 1. ESTABLISHMENT of the fund
Petty Cash Fund XXXXX
Cash in Bank
XXXXX
To record establishment of the
fund

2. MAKING PAYMENTS/DISBURSEMENTS from the fund

NO ENTRY FOR THE
PAYMENT OF THE FUND
MEMO ENTRY IN PETTY
CASH BOOK
3. REPLENISHMENT from the fund
Expenses XXXXX
Cash in Bank
XXXXX
To record replenishment of the fund
**To INCREASE/DECREASE the fund
Petty Cash Fund XXXXX
Cash in Bank
XXXXX
To record increase of the fund
Cash in Bank XXXXX
Petty Cash Fund
XXXXX
To record decrease of the fund

USES OF A BANK
contributes to good internal control over cash
minimizes the amount of currency on hand
creates a double record of bank transaction
bank reconciliation
BOOK CASH ASSET ----> Increase (DEBIT) Decrease (CREDIT)
BANK DEPOSIT LIABILITY ----> Increase (CREDIT) Decrease (DEBIT)
3 Kinds of Deposit Accounts
+ Demand Deposits current account or checking account where deposits are
covered by deposit slips and withdrawals are done through the issuance of checks
** Only deposit for Bank Reconciliation
+ Savings Deposit deposits and withdrawals in this account require the
presentation of a passbook
+ Time Deposit same as savings account. It is evidenced by a certificate of
deposit
Bank Statement - how the bank recorded transactions of the month
- is a report prepared by the bank which shows the deposits made, checks paid and
other charges and credits and credits recorded by the bank for the month as well as
the cash balance per bank records.
- starting point in preparing bank reconciliation
- informed some transactions recorded by the bank that you are unaware of
DEBIT MEMORANDUM (decrease balance) bank service charge & NSF (Not
Sufficient Fund)
CREDIT MEMORANDUM (increase balance) collect Notes Receivable and
interest earned

BANK RECONCILIATION
- is a schedule prepared by an entity (depositor) explaining the difference between
the banks & the companys record of cash
- prepared once a month, for a checking account
- reasons of reconciling: time lags and errors
RECONCILING ITEMS
[BANK]
Deposit in Transit cash receipts recorded by the depositor but which reached
the bank to late to be included in the bank statement for the current month.
- added to the balance per bank statement
Outstanding Checks checks issued by the depositor but are not yet presented
to the bank for payment
-deducted from the balance per bank statement
[BOOK]
Unrecorded Bank Charges items which are charged or debited by the bank to
account of the depositor aside from checks paid presented to the bank for payment.

Example: Bank Service Charges and NSF (Not Sufficiently Funded) Checks
-deducted from the balance per book
Unrecorded Bank Credits items which are credited by the bank to the account
of the depositor aside from deposits received.
Example: Collection of Notes Receivable and Interest Earned
- added to the balance per book
Errors mistakes committed by either bank or the depositor which makes the
balance disagree
Common Errors by the Bank
- Depositor of another company credited to the entitys account
- Check drown by another company charged by to the entitys account
Common Errors by the Depositor
- Overstatement/Understatement of cash receipts
- Understatement
Three ways of Bank Reconciliation
1. Book to Bank
2. Bank to Book
3. Adjusted Balances

Cash Balance
Per Bank Statement Per Books
Adjustments to the Bank Balance Adjustments to the Book
Balance
+ Deposit in Transit + Notes Collection
- Outstanding Checks - NSF Checks
+- Bank Errors - Check Printing/Service
Charges
+- Bank Errors

BUSINESS NAME
BANK RECONCILIATION
For the Month Ended 20XX
Unadjusted Balance per Bank Statement XXXX
Add: Deposit in Transit XXXX
Less: Outstanding Balance (XXXX)
Adjusted Cash Balance per Bank XXXX
Unadjusted Balance per Book XXXX
Add: Collection of Noted Receivable XXXX
Collection of Interest XXXX
Less: Bank Service Charge (XXXX)
Note Collection Fee (XXXX)
Adjusted Cash Balance per Book XXXX

After bank reconciliation was prepared, it is necessary to make some journal entries
to reflect the differences noted.
We only prepared adjusting entries for reconciling, terms of the book
Journal Entries:
Cash in Book XXXX
Notes Receivable XXXX
Interest Income XXXX
To record collection of notes and interest
Accounts Receivable XXXX
Cash in Bank XXXX
To record bouncing of NSF checks
Miscellaneous Expense/Bank Service Charge XXXX
Cash in Bank XXXX
To record bank service charges