ac101_ch6 - Revised July 2008 ACC101 CHAPTER 6 Accounting...

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Revised July 2008 Page 1 of 14 ACC101 – CHAPTER 6 Accounting Cash and Internal Controls
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Revised July 2008 Page 2 of 14 Key Terms and Concepts to Know Purpose of Internal Controls: Internals controls are a system of policies and procedures used by companies to safeguard assets and ensure that transactions are recorded properly and in a timely manner. Principles of Internal Control: Establish responsibilities Maintain adequate records Insure assets and bond employees Separation of incompatible duties and responsibilities Separation of recordkeeping from custody of assets Independent review of activities Apply technological controls Bank Reconciliation: Identifies and explains the differences or reconciling items between the cash balance in the depositor’s general ledger and the cash balance according to the bank’s records. Reconciling items are transactions which have been recorded by either the depositor or the bank, but not both, AND transactions which were not properly recorded by the depositor and/or the bank. Adjusting entries are recorded by the depositor for all reconciling items on the depositor’s side of the bank reconciliation. If the adjusting entries are not recorded, these items will continue to appear on the reconciliation if subsequent months until the adjusting entries have been made. Petty Cash Account: Imprest account (balance does not fluctuate as cash is spent or replenished) Account is used to pay for minor expenses. Account is debited when it is created or the balance is increased and credited when the balance is decreased. Voucher System: A set of control procedures designed to ensure the cash disbursements have been properly approved and are supported by the appropriate documents. Days Sales Uncollected Ratio ( Days Sales Outstanding Ratio)
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Revised July 2008 Page 3 of 14 The Bank Reconciliation The balance according to the bank statement and the balance according to the depositor’s records must be adjusted in order to accurately compute the cash balance. Each balance is adjusted for items not previously recorded as follows: Bank’s Balance Depositor’s Balance Add: Deposits in Transit Add: Notes collected by the bank Errors Errors Deduct: Outstanding Checks Deduct: Service Charges Errors NSF checks Errors ** All adjustments to the depositor’s balance MUST be journalized in order for the cash account in the ledger to agree with the adjusted cash balance. ** Example #1 The cash account for Ace Co. on August 31, 2004, indicated a balance of $9,420. The bank statement indicated a balance of $12,785 on August 31, 2004. The following reconciling items were discovered. a. Checks outstanding totaled $6,240. b. A deposit of $5,375, representing cash receipts of August 31, had been made too late to appear on the bank statement.
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ac101_ch6 - Revised July 2008 ACC101 CHAPTER 6 Accounting...

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