ACCOUNTING HOMEWORK

5. Internal control: Bank reconciliation

Required reading

Reading 5: Horngren, C. T., Harrison, W. T. , & Oliver, M. S. (2012). Internal control and cash.

Note that this reading is taken from another text by Horngren.

From the Internet:

http://www.accountingcoach.com/online-accounting-course/13Xpg02.html

http://www.youtube.com/watch?v=73GjBKO3BkM

http://www.youtube.com/watch?v=xfsKUCSg6_M

Managers should be aware that there are certain attributes of accounting systems which will allow them to perform their responsibilities more efficiently and effectively. A number of administrative and accounting controls which, aided by a system of internal controls, promote efficiency and effectiveness and satisfaction of the organisation’s goals. Controlling the business includes:

1. stewardship of the assets

2. the preparation of accurate and reliable accounting records

3. maximising the wealth of the owners through the efficient use of the company’s scarce resources

4. pursuing other corporate objectives; environmentally safe, community participation etc.

The features and design of an effective accounting system are outside the scope of this subject. One form of internal control which should be adopted by all organisations is a bank reconciliation. This recommendation applies equally to charitable or profit oriented organisations both large and small.

Cash is an asset which is subject to a high degree of risk. In addition to the separation of duties and proper supervision of staff who handle cash or make the adjustments to the accounting records, the Bank Reconciliation will provide evidence of the reconciliation between the internal records of the organisation (Cash at Bank Account) and the external records of the bank (a Bank Statement).

The internal accounting records of the business relating to cash follow these rules:

If cash is available the account is in debit balance, and would be regarded as a normal balance.

Account overdrawn: the Cash Account is in credit balance.

Note: These are the opposite to the records of the bank. If your bank account has money available then the bank’s record of your account or the Bank Statement will show a credit balance. If your account is overdrawn then the bank statement will show a debit balance.

You should now read Reading 5: Internal control and cash

Learning objectives

Having successfully completed this topic you will be able to:

· perform the steps in preparing a bank reconciliation.

Test your knowledge by attempting the following review questions.

Review question 1

Dot Smith regularly has her accountant perform a reconciliation between the balance of her Cash at Bank account and the balance of her bank account as shown on the bank statement. This month her accountant is on holidays and you have been asked to perform the reconciliation.

The following details are provided for the month of May;

1. The Cash at Bank balance in D. Smith’s books on 1 May was $1,088.42 debit, and the bank statement for May showed a credit balance of $3,321.16.

2. The total of cash receipts for May was $56,374.33 and the total of cash payments for May was $54,376.28. These amounts have not been posted to the Cash at Bank ledger account.

3. Unpresented cheques were $435.24.

4. The following debit entries were recorded in the bank statement:

· bank charges for May, $50

· a cheque received from a customer and deposited by Dot in the bank was returned because of insufficient funds - $203.75.

5. A credit entry in the bank statement revealed that a direct deposit of $760 had been made to Dot’s account. This had not been recorded in the books of the business.

6. A deposit of $742.80 was in transit on 31 May.

7. An error has been detected in the accounting records; cheque no. 501 for $159.20 being payment for rent was incorrectly recorded as $195.20 in the Cash Payments journal.

Check answer

Adjusted balance in the reconciliation should be $3,628.72.

Review question 2

Topic 5 Questions and solutions

Study questions

Selected from Horngren, et al., (2008). Accounting (7th ed.). Pearson Prentice Hall, Ch. 8, pp. 436-437, 438, 439, 441, 442, 447, 448.

Quick Check questions

Solutions to study questions

Quick Check

Answers:

1. c	3. c	5. c	7. c	9. b
2. d	4. d	6. d	8. b	10. d

Explanations:

8. b. Adjusted cash balance is $650 ($770 − Service charge

$20 − NSF check $100)

S 8-8

The cash in the cash drawer will be $500 lower than the total amount recorded by the cash register.

E 8-14

a. Weakness. The control environment will not be as effective as it would be if top management led in establishing internal controls.

b. Weakness. The accounting department should not be allowed to order merchandise. An accountant could have goods sent to his / her home and then approve payment for the goods.

c. Weakness. The sales clerk should not have access to the total recorded by the machine. The clerk could steal cash and delete a cash receipt from the machine record.

d. Weakness. The officer should examine the payment packet to ensure that the payment is for the correct amount.

E 8-17

D.J. Hunter
Bank Reconciliation
September 30, 20XX
BANK:
Balance, September 30		$ 431
Add: Deposit in transit		1,209
Less: Outstanding checks:
Check No.
626	$ (75)
627	(275)	(350)
Adjusted bank balance		$1,290
BOOKS:
Balance, September 30		$1,330
Less:
Correction of book error—
Recorded $68 check as $58	$ (10)
Cost of checks	(18)
Service charge	(12)	(40)
Adjusted book balance		$1,290

Hunter has cash of $1,290 on September 30.

E 8-21

TO: Store Manager

There is a weakness in internal control over cash receipts. The cash register keeps no internal record of sales. With no record of sales, you can’t determine how much cash should be in the cash drawer. This makes it easy for the cashier to steal cash and not get caught.

To improve internal control over cash, we should use cash registers that record each sale inside the machine. The manager can prove the amount of cash in the cash drawer against this recorded amount.

P 8-32B

TO: Adam Klaus

FROM: Consultant

RE: Internal Control

Every business needs a system of internal controls. Internal control is the organizational plan and all the related measures adopted by an entity to (1) safeguard assets, (2) encourage employees to follow company policy, (3) promote operational efficiency, and (4) ensure accurate and reliable accounting records. Adam, you must set the tone at the top to let everyone know we have a reasonable control environment.

A company with an effective system of internal control needs competent and reliable personnel. The business may have to increase employee pay in order to attract and retain high-quality employees.

You need to assign responsibilities to employees so that everyone knows his or her duties. This avoids confusion and helps ensure that all jobs are performed.

Certain duties should be separated between two or more employees to limit the opportunity for fraud. For example, the custody of cash should be separated from the accounting for cash.

The business may need to have an audit by a CPA. Auditors can evaluate our system of internal control and suggest ways to improve efficiency. Auditors also gauge the reliability of accounting records, which provide the information for our decisions.

Documents are needed to keep track of sales and cash receipts, expenses, and payments. These records will help us track transactions and manage the business better.

Electronic and other controls can safeguard assets. Encryption and firewalls can protect our data files. We need burglar alarms to protect buildings, and we should store important documents in fireproof vaults. You should rotate employees from job to job. This will keep them honest.

Responses may vary.

P 8-34B

Dunlap Dollar Stores
Bank Reconciliation
April 30, 2008
BANK:
Balance, April 30		$18,080
Add: Deposits in transit ($1,060 + $330)		1,390
		19,470
Less: Outstanding checks:
Check No.
3119	$ 630
3120	1,670
3121	100
3122	2,410	(4,810)
Adjusted bank balance, April 30		$14,660
BOOKS:
Balance, April 30		$13,640
Add: EFT collection of rent	$ 300
Bank collection of note receivable	1,300
Book error—$1,390 check
recorded as $1,930	540	2,140
		15,780
Less: EFT payment of insurance	$ 200
NSF check	900
Service charge	20	(1,120)
Adjusted book balance, April 30		$14,660

Topic 5 Solution to Review Questions 1

Step 1 Adjust cash receipts

Balance 56,374.33

ADD: Direct deposit 760.00

Adjusted balance 57,134.33

Step 2 Adjust cash payments

Balance 54,376.28

ADD: Bank fees 50.00

Returned Chq 203.75

54,630.03

Less: Adjustment for chq No. 501 36.00

54,594.03

Step 3 Reconstruct cash at bank account in general ledger:

Cash at bank

May 1 balance 1088.42 Cash payments - May 54,594.03

Cash Receipts May 57,134.33 Balance 31 May c/d 3,628.72

58,222.75 58,222.75

31 May balance b/d 3,628.72

Step 4 Prepare reconciliation statement:

Balance as per Bank Statement 3,321.16Cr

ADD: Deposit in transit 742.80

4,063.96

LESS: Unpresented cheques 435.24

Balance per cash at Bank Account 3,628.72

Topic 5 solution to Review question 2