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BAO1107 Accounting Information System School of Accounting & Finance Faculty of Business and Law

Revision from Topic Four
Special journals Special ledgers General ledgers

Current Assets and Internal Control
 Reading & References
 Textbook Chapter 7 and 11

PowerPoint presentation by Anne Abraham,University of Wollongong ©2009 John Wiley & Sons Australia, Ltd

Current Assets and Internal Control
Learning objectives

 Define the term cash as it is used in accounting ;  Explain internal control procedures relevant to the control of   

 

cash receipts and cash payments; Identify the purpose and control features in maintaining a bank account and prepare a bank reconciliation statement; Explain the purpose of a petty cash fund, understand how one operates, and account for petty cash; Identify the purpose and control features of a cash budget and prepare a cash budget; Explain the essential principles of cash management; Understand and interpret measures of cash adequacy

Contents
 Internal Control  Cash and Cash Control  Bank Reconciliation  Petty Cash Fund

Internal Control
Internal Control is a means to enhance the reliability of the accounting information to be used by dependent users in making economic decisions. Hoggett & Edwards (1996, pp. 353) define Internal Control as a system that “…consists of all measures employed by a business to safeguard its resources against waste, fraud and inefficiency; promote the reliability of accounting data; and encourage compliance with business policies and government regulation”. The primary qualitative characteristics of the GPFR identified in SAC 3 are relevance and reliability.

Types of Internal Control
 Administration controls  Accounting controls

Administration Controls
 Measures that increase the operational efficiency and

compliance with policies in all parts of the organisation.
 Operational Efficiency includes:  Selection of staff;  Position descriptions;  Orientation packages for new staff;  Procedures manuals.  Managerial Policies include:  Analysis of results;  Performance evaluation;  Quality control.

Accounting Controls
 Methods and procedures used to protect the

assets and to ensure the reliability of the accounting records.
 Reliability of accounting records includes:
  

Trial Balance Reconciliation of subsidiary ledgers with control accounts. Bank Reconciliation

Elements of Internal Control
       

Organisation controls; Segregation of duties; Physical controls; Authorisation and approval; Arithmetical and accounting controls; Personnel; Supervision; Management controls.

Limitations of Internal Control Structures
 Controls must be cost effective The cost of control must be less than the cost of the fraud or errors detected.  Most controls relate to routine transactions Unusual or one-off transactions may not be subject to the same controls.  Control may be ineffective due to human error For example: carelessness, distraction, and mistakes of judgement, misunderstanding instructions.



Most controls are directed to the individual

If employees collude, or the employee responsible for the control does not exercise that control then the system breaks down.

 Changing conditions may render the internal control structure ineffective. For example: the change from a manual to a computerised accounting information system. There can only be reasonable assurance as to the effectiveness of the internal control system.

Cash and Cash Controls
Cash is liquid, not easy to identify individually, easily transferable and easily misappropriated. Liquidity is also one of the major components in the success or failure of a business. It should, therefore, be subject to tight internal control.

Cash and Cash Controls
 Elements of cash control
 Separation of duties  The separation of responsibility for handling and

safeguarding cash from the responsibility for maintaining accounting records for cash transactions.
 Banking.  the necessity to bank cash on a daily basis  the necessity of making all payments by cheque.

BANK ACCOUNTS AND RECONCILIATION
Bank Reconciliation Statements
 Banks are able to safeguard cash and provide detailed

records of cash transactions (ie verifiable measurement of economic events). The bank statement should show the same transactions and the same cash balance as the entity’s cash records.
 The reconciliation process is concerned with identifying

any differences between the bank statement and the business’ cash records and making the appropriate corrections to those records.

Bank reconciliation
Why the bank statement does not equal the cash records:
1. Items recorded in the Bank Statement only  For example:  Direct deposits or payments  Bank charges  Interest  Dishonoured cheques  Update the cash records

Bank reconciliation
2. Items in the cash records not yet recorded in

the bank statement
 For example:  Un-presented cheques  Deposits not credited.

 Bank Reconciliation Statement

Bank reconciliation
3. Errors  For example:  Transpositions of amounts in the business records.  Cheques entered into the incorrect bank account in the banks records.

 If business error – update cash records
 If bank error – record in the Bank Reconciliation

Statement

Note: The bank reconciliation procedure is completed before the cash journals are posted to the general ledger.

Bank reconciliation continued
Reconciliation procedure
 Need to have  Last bank reconciliation  Cash receipts and cash payments journals for the period  Cash at bank ledger account  Bank statement for the period since the last reconciliation

Bank reconciliation continued
Steps in the preparation of the Bank Reconciliation Statement 1. Compare the Bank Statement and the cash journals  Identify the items that appear on one or the other but not both records. 2. Update the cash journals  Record those items found in the bank statement that were not in the cash journals including the correction of any journal errors found in the bank statement. 3. Post the cash journals to the general ledger  Calculate the balance in the Cash at Bank Ledger account. 4. Prepare the Bank Reconciliation Statement  This will explain any differences still remaining between the bank’s records and the business’s records.

Bank reconciliation continued
R. ROBSON AND SON Bank Reconciliation Statement as at … 2010

Balance as per bank statement Cr (or Dr) Add (or deduct) outstanding deposits Deduct (or add) unpresented cheques Balance as per Cash at Bank account Dr (or Cr) $XX XX XX

$XXX XXX XXX

XXX $XXX

Preparing a Bank Reconciliation Statement
Lecture Illustration The following information relates to R Roberts. Required:  Adjust the cash journals as required from the Bank Statement;  Total and post the cash journals for July;  Balance the cash at bank ledger account;  Prepare the bank reconciliation statement.

Preparing a Bank Reconciliation Statement
R Roberts Bank Reconciliation Statement as at 30th June 2009 $ $ Balance as per Bank Statement 2,672.46 add Deposits Not Credited 496.13 3,168.59 less Un-presented Cheques No 472 56.00 No 486 134.90 190.90 Balance as per Bank 2,977.69

THE VUT BANKING CORPORATION WERRIBEE VICTORIA Statement of Account for:R Roberts Milton StreetSunshine 3434 July Statement Particulars July 1 Balance 2 CC 489 4 CC 486 5 Fees 14 CC 490 Adj (T Watson) 16 492 19 CC 21 Int Gov’t Bonds 29 FBT Date of Issue: 31 July 2009 Debit $ Account No 23058719804 Credit Balance $ $ 2,672.46 3,168.59 2,958.59 3,566.99 3,432.09 3,427.09 3,519.09 3,409.09 3,314.87 3,104.87 4,131.03 4,347.03 4,344.03 Page 16

496.13 210.00 608.40 134.90 5.00 92.00 110.00 94.22 210.00 1,026.16 216.00 3.00

Date Particulars July 1 Rent Sales 13 Sales 19 Commission Sales J Carter 30 A Wilson 31 Interest received Dis chq – T Watson

Cash Receipts Journal Post Rec Disc Acc Ref No Allow Rec Sales 274 CRR 116.00 CRR 92.00 275 CRR 204.16 276 100.00 277 12.60 802.60 B/S B/S (**) (94.22) 12.60 808.38 412.16

Sundry 492.40

Bank 608.40 92.00

722.00 1,026.16 790.00 216.00 (94.22) 2,638.34

216.00

1,430.40

CASH PAYMENTS JOURNAL
Date Particulars Pos t Ref July 2 Wages Rent 10 Purchases 16 Wages 25 C Willis 29 Advertising 31 Bank charges Bank charges Ch q No 489 490 491 492 493 494 B/S B/S Disc Rec Acc Pay Purch Sundr y 210.00 110.00 210.00 16.85 603.15 373.85 5.00 3.00 Bank 210.00 110.00 876.50 210.00 586.30 373.85 5.00 3.00

876.50

16.85 603.15 876.50 911.85 2,374.6 5

Date

Details

Post Ref

Cash at Bank Amount $ Date

Details

Post Ref

Amount $ 2,374.65 3,241.38 5,616.03

30/6 Balance 30/7 Sund Cash Rec 30/7 Balance c/d

2,977.69 30/7 Sund Cash Pay 2,638.34 30/7 Balance 5,616.03 3,241.38

R Roberts Bank Reconciliation Statement as at 31 July 2009 $ Bal as per Bank Statement add Deposits Not Credited less Unpresented Cheques No 472 No 491 No 493 No 494 Bal as per Cash at Bank

$ 4,344.03 790.00 5,134.03

56.00 876.50 586.30 373.85

1,892.65 3,241.38

PETTY CASH FUND
The common method of controlling cash is to make all payments by cheque. This is a key feature of internal control for cash. However, it is not always practical or cost effective to do this. For occasions where minor payments need to be made, for example, bus fare, postage, coffee supplies, it becomes practical to keep small amounts of money on hand for these purchases. This is known as Petty Cash.

The system of petty cash used here is known as the Imprest System.

PETTY CASH FUND
Features of the Imprest System of Petty Cash.  The determination of a fixed sum which becomes the Petty Cash Advance.
Establishing the fund
Jan 2 Petty Cash Cash at Bank (Petty cash fund established) 100 100

 Recording of petty cash payments is kept separately from the general

ledger records.  Petty cash reimbursement is always for the amount expended so that the petty cash fund remains at the original petty cash advance.  Recording of the expenses from petty cash are only entered into the general ledger when the petty cash is reimbursed.

PETTY CASH FUND
Petty Cash Advance  The petty cash fund is established by writing a cheque from the business bank account to the petty cash cashier for Petty Cash Advance.
Petty Cash payments  Whenever money is withdrawn from petty cash a Petty Cash Voucher is used to record the event. This document serves as an authority to make the payment and becomes the Source Document for the petty cash records.
 Petty cash details are then recorded into the Petty Cash

Book from the petty cash vouchers.

PETTY CASH FUND
Petty Cash Reimbursement
 The petty cash fund is reimbursed whenever the money in

the petty cash fund gets a little low or prior to the preparation of the GPFR. The reimbursement always equals the amount spent.
  It is when the reimbursement cheque is recorded in the

Cash Payments Journal (some systems use the General Journal) that the expenses for petty cash are recorded in the General Ledger.

PETTY CASH FUND
 Reimbursing the fund
Jan 31 Stationery Expense Office Supplies Expense Postage Expense GST Outlays Cash at Bank (Petty cash fund reimbursement) 15.20 12.30 56.47 8.40

92.39

If special journals this entry would be recorded in the cash payments journal

Petty Cash Fund Source Document
Petty Cash Voucher

1

No 001 PETTY CASH VOUCHER Date: 5 March 2009 Paid To: B Barton For: Postage Amount: $1.70 Authorised by: E Austen
2

3

PETTY CASH FUND
Internal control features of the Petty Cash Voucher
 Consecutive numbering  Authorisation

 Separation of duties.

Petty Cash Fund
Recording Petty Cash Transactions Lecture Illustration The following information relates to N Gulf, Solicitor. Required:  Record the Petty Cash Advance of $20.00.  Record the Petty Cash Vouchers into the Petty Cash Book.  Balance the Petty Cash Book and reimburse through the Cash Payments Journal.

Petty Cash Vouchers No 001 PETTY CASH VOUCHER Date: 5 March 2009 Paid To: B Barton For: Postage Amount: $1.70 Authorised by: E Austen PETTY CASH VOUCHER Date: 5 March 2009 Paid To: G Grey For: Travel Amount: $1.90 Authorised by: E Austen No 002 PETTY CASH VOUCHER Date: 5 March 2009 Paid To: G Grey For: Broom Amount: $1.20 Authorised by: E Austen No 003

No 004 PETTY CASH VOUCHER Date: 6 March 2009 Paid To: G Barry For: Envelopes Amount: $3.00 Authorised by: E Austen PETTY CASH VOUCHER Date: 6 March 2009 Paid To: B Barton For: Postage Amount: $3.60 Authorised by: E Austen

No 005 PETTY CASH VOUCHER Date: 8 March 2009 Paid To: G Gregory For: Travel Amount: $3.00 Authorised by: E Austen

No 006

No 007 PETTY CASH VOUCHER Date: 8 March 2009 Paid To: B Barton For: Pens Amount: $1.40 Authorised by: E Austen PETTY CASH VOUCHER Date: 8 March 2009 Paid To: A McLean For: Freight Amount: $1.30 Authorised by: E Austen

No 008

Petty Cash Book Date Mar 1 Details P/C Adv 5 B Burton G Grey G Grey 6 G Barry B Barton 7 G Gregory 8 B Barton A McLean Balance 20.00 Bal c/d P/C Reim 2.90 17.10 20.00 Vch chq 001 002 003 004 005 006 007 008 20.00 Rec 20.00 1.70 1.90 1.20 3.00 3.60 3.00 1.40 1.30 17.10 2.90 20.00 1.30 6.60 4.90 4.40 1.20 3.60 3.00 1.40 3.00 1.70 1.90 1.20 Pay Analysis of Payments Post Trav Off Sun

Date Particulars Mar Petty Cash Advance

Cash Payments Journal Post Chq Disc Acc Ref No Rec Pay xx

Purch

Sundry 20.00

Bank 20.00

Petty Cash Reimbursement - Postage - Travel - Office - Sundry

xx 6.60 4.90 4.40 1.20

17.10

37.10

37.10

General Ledger Post Ref Cash at Bank Amount $ Date Post Ref CPJ Amount $ 38.90

Date

Details

Details

30/3 Sund Cash Pay

Date 1/3 Bank

Details

Post Ref CPJ

Petty Cash Advance Amount $ Date 20.00

Details

Post Ref

Amount $

Date 30/3 Bank

Details

Post Ref CPJ

Postage Amount $ Date 6.60

Details

Post Ref

Amount $

Date 30/3 Bank

Details

Post Ref CPJ

Travel Amount $ Date 4.90

Details

Post Ref

Amount $

Date 30/3 Bank

Details

Post Ref CPJ

Office Amount $ Date 6.20

Details

Post Ref

Amount $

Date 30/3 Bank

Details

Post Ref CPJ

Sundry Amount $ Date 1.20

Details

Post Ref

Amount $

Tutorial questions
 Chapter 11  Discussion question 4  Problem 11.5 & 11.8

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...Title: Porous powers create Los Angeles’s character Los Angeles is a young city usually portrayed as a unique place that it captures the essence of a multi-ecological setting bringing the ocean, the skyscraper, and the happiest place on earth under one rooftop. Under this successful marketing pitch, the city has become one of the world’s biggest metropolises. However, the city is in the middle of the desert, and has insufficient natural resources to sustain life. As McWilliams said “Man has made it what it is” (pg.183). This diverse complex metropolis has had many rulers, but all of them have something in common, they have wealth, or they have control over scarce resources, a required need in which the individuals in the area acquire. These characteristics gives them the power, not a complete control, but rather the ability to set the terms under which other groups and classes must operate. In order to keep their power, they must be able to manage both wealth and resources. In this anthology I would present a view of the changes in the power groups in Los Angeles, how these changes created the character of the city, and who was left out of this equation throughout history. In every society there are experiences and material objects that are highly valued. If it is assumed that everyone in the society would like to have as great a share as possible of these experiences and objects, then the distribution of values in that society can be utilized as a power indicator. Those who...

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...vehicles on the road keep increasing with the growing population, but the roads stay the same. Take Los Angeles for example: the estimated population is 3.7 million with the average household having 1.8 vehicles. This makes the estimated vehicles in LA roughly 6.5 million with millions more commuting to the city for work, school, and other activities. With these facts combined it makes for one of the most stressful scenarios Californians will ever encounter. A person in California will quickly learn the meaning of time management. A commuter will have many different variables that will affect their commutes on a daily basis. Accidents, construction, and weather are just a few examples of these variables. Accidents can affect a drivers’ commute from minutes to hours depending on the severity. Construction may not have the same affect as accidents, however; it could lead to taking different exits, freeways, and roads, greatly increasing the length of a drivers’ trip by distance and time. Even though Los Angeles regularly experiences rainfall, drivers are still extremely cautious and slow down their speeds anywhere from 10-30 mph causing congestion and gridlock. Having all these obstacles to consider, a California driver has to learn the importance of time management and apply it to their commutes. In conclusion, there are still many other factors and topics that affect traffic in Los Angeles but understanding the importance of time management and personal responsibility will make...

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Crips vs Bloods

...Crips and Bloods The Crips and the Bloods have many differences, but they also have some similarities. The first difference would be their gang color. Crip gang members associate with the color blue in their dresses while the Bloods associate with the color red. The Crips were founded in the 1970’s in L.A. after the breakup of the Black Panther party and were originally set to protect the African American party. The Bloods founded by several gangs joined together to try and stop the Crips from expanding. Crips out number Bloods 2 to 1 so Bloods have to be more ruthless because some of their neighborhoods are surrounded on several sides by Crip sets. Although they have a lot of differences they also have some similarities. The financing of both gangs are a complex web of intrigue and irony, given their willingness to commit violent acts. Due to their inability to lay aside differences in most instances, Bloods and Crips – while numerous – are among the poorest of criminal organizations in the US. While there are Blood and Crip dealers (both inside prison and without), most use the sets as coverage and security for the operations rather than for practical business cooperation. Both groups have a relatively low threshold for membership. To get into most sets you have to be sponsored for membership by someone already in the gang and then you get "jumped in". : Most Crip or Blood sets have no ideological leanings other than defending their territory, engaging in minor street-level...

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