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Cash and Internal Controls
Cash and Internal Controls
Student Handout and Activities
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4.1 Prepare bank account documents (e.g., checks, deposit/withdrawal slips, endorsements, etc.)
4.2 Read and reconcile bank statements
4.3 Explain cash control procedures (e.g., signature cards, deposit slips, internal/external controls, cash clearing, etc.)
4.4 Explain the purpose of internal accounting controls
4.1 Prepare bank account documents (e.g., checks, deposit/withdrawal slips, endorsements, etc.)
a. Identify types of bank account documents that are prepared on a regular basis.b. Explain the information that must be provided on checks.c. Describe how to fill out checks correctly.d. Discuss the importance of legibility in filling out checks.e. Explain how to fill out deposit/withdrawal slips correctly.f. Discuss how to place a stop payment on checks.g. Describe how to endorse checks.h. Demonstrate procedures for preparing bank account documents.4.1 Prepare bank account documents (e.g., checks, deposit/withdrawal slips, endorsements, etc.)
Activity:
Using the practice checks (Page 2) and deposit slips (page 3) of your jam board that you copied for the 9 transactions.1. On October 14, 20XX, you write a check for $39.95 to AT&T for your cell phone bill.2. On October 17, 20XX, you write a check for $68.34 to Aéropostale for new clothes.3. On October 17, 20XX, you deposit two checks into your bank account. One check is from your employer, T.G.I. Friday’s, for $212.38, and the other is from your aunt, Dixie Sweet, for $17.00.4. On October 21, 20XX, you write a check for $45.22 to Best Buy for new DVDs.5. On October 22, 20XX, you write a check for $65.46 to American Family Insurance for your monthly car insurance payment.6. On October 23, 20XX, you deposit $87.21in cash into your bank account. Your cash consists of two twenty-dollar bills, six five-dollar bills, eight one-dollar bills, and $9.21 in change.7. On October 24, 20XX, you write a check for $15.00 to your school for Spanish Club dues.8. On October 28, 20XX, you write a check for $20.00 to your best friend to pay him/her back for the money that s/he lent you.9. On October 31, 20XX, you deposit another check from your employer. The check amount is $198.89, but you withdraw $20.00 from your account at the same time that you deposit your paycheck.Bank Account Documents—Discussion Guide
THINK ABOUT IT
Most banking is done online these days. Due to technology, there are fewer reasons all the time to visit a bank branch. Nonetheless, it is important to know what bank documents are and how they are used in accounting.
KEY CONCEPTS
Slide #1 Even in today’s computerized world, accountants still regularly prepare and use a number of bank account documents. Two of the most common bank documents are: Checks & Deposit slips
Slide #2 A check is a document that authorizes a person or organization to withdraw money from of a bank account.
It is dated, written, and signed by a payer and provided to a payee.There are a number of different kinds of checks including:- Personal checks
- Cashier’s checks
- Certified checks
- Payroll checks
- The date the check is issued
- The name of the payer
- The payer’s bank account number
- The name of the payee
- The withdrawal amount in number form
- The withdrawal amount in word form
- The payer’s signature
- There is typically also a line on a personal check marked “Memo” or “For.”
- This area is optional and allows the payer to write information that will help her/him remember why the check was written.
For a practice check, make sure every student has a copy of this Jam Board
For a video on how to properly write a check, click here: How to write a check.
Slide #3 An endorsement is the signature on the back of a check that is completed by the payee and indicates that the check has been received.
In some cases, the payee will write “For Deposit Only” in the endorsement area on the back of the check to designate that s/he intends for the amount on the check to be deposited into a bank account.If a payee chooses to transfer the check to another person or organization, s/he can endorse the check with her/his signature, and transfer the check to a new payee, who becomes the new owner of the check and can deposit it or transfer it as s/he chooses.- For more information on endorsing a check, click here: https://www.thebalance.com/instructions-and-problems-with-signing-a-check-over-315318.
- In order to request a stop payment, the payer should contact her/his financial institution, which may require a written statement and will instruct the payer on how to proceed.
- A stop payment can usually be issued only before the check is deposited or cashed by the payee.
Slide #4 A deposit slip is a document that provides information on the amount of money a customer wants added to her/his account at the financial institution.
A completed deposit slip includes:- The date of the deposit
- The customer’s name
- The customer’s account number
- A list of the checks being deposited
- The total cash being deposited
- The total amount being deposited
- The customer’s signature
4.2 Read and reconcile bank statements
4.2 Read and reconcile bank statements
Objectives:
a. Define the following terms: reconcile, bank statement, transaction, transaction fee, balance, and overdraft protection.b. Explain the components of a bank statement.c. Identify problems that may occur when bank statements are not reconciled.d. Discuss actions to take if a bank statement is incorrect.e. Explain procedures for reading and reconciling bank statements.f. Demonstrate how to read and reconcile a bank statement.Activity:
Using the checkbook guide (Checkbook Guide), complete January's monthly transactions on this Checkbook Register (make a copy) CHECK with your instructor before you move on.
Make sure the bank balance agrees with the checkbook before you proceed to February. Don't forget the service charge.
Do the Following Months
Ethics Case for Students:
You recently purchased a new laptop for school with your debit card. When you receive your bank statement at the end of the month, you notice that the purchase is not listed on your statement and the money was never removed from your account. You are hesitant to inform your bank of the discrepancy, considering how much extra money you now have. It was the bank’s mistake anyway, right? What should you do?
Student (Checkbook Guide)
Student Checkbook Register Teacher Checkbook Key Teacher Guide
Reconciling Bank Statements—Discussion Guide
Slide #6 THINK ABOUT IT
One way that companies double-check aspects of their own internal accounting is to compare the transactions they have recorded in their books with the ones listed on their monthly bank statement. Sometimes, discrepancies between the bank statement and a company’s records are the results of accounting errors either at the bank or in the company’s books. Sometimes, however, a discrepancy could point to an instance of fraud.
KEY CONCEPTS
Slide #7 Each month, banks issue a monthly bank statement to their customers.
This document includes a list of all the transactions that affected the customer’s bank account for the previous month. Typically, a bank statement contains the following information about the customer’s bank account:- The balance at the start of the month
- A list of deposits made to the account
- A list of withdrawals from the account
- Any interest accrued on the account
- Any fees charged to the account
The balance at the end of the month
Slide #7 When the bank statement is received, someone at the company compares the list of transactions in the statement to the list of transactions in the company’s books.
This process is called a bank reconciliation, and it is a very important step to ensuring that the company’s accounting practices are accurate and free of suspicious activity.Ideally, the ending balance of the bank statement should be equal to the ending balance of the company’s cash account for the month.
- There are a number of reasons why these two balances might not match, however.
- For example, transactions recorded in the cash journal for one month may not appear in the bank statement because of a gap between when a check is written and when it is received.
- Another common reason for a discrepancy in the balances is that bank fees often only show up in the monthly bank statement and, therefore, have not yet been added to the books.
- The process of bank reconciliation will make these discrepancies easy to find and adjust, if needed.
- There are a number of reasons why these two balances might not match, however.
NOTE: In some smaller companies, all cash transactions are recorded together in a cash book, which is like a combination of a cash receipts journal, a cash disbursements journal, and a cash account in a general ledger.
4.3 Explain cash control procedures (e.g., signature cards, deposit slips, internal/external controls, cash clearing, etc.)
4.3 Explain cash control procedures (e.g., signature cards, deposit slips, internal/external controls, cash clearing, etc.)
Curriculum Planning Level:
Curriculum Planning Level:
Objectives:
a. Define the terms: cash, cash receipts, cash disbursements, cash control, and separation of duties. b. Explain reasons for recording cash transactions.c. Explain reasons for restricting access to cash. d. Explain reasons for separating responsibilities for cash transactions. e. Discuss the impact of volume on the types of controls a business may implement over cash transactions. f. Explain ways that a business can maintain control of its cash.4.3 Activity
Get into pairs or Individuals. Each group of students should interview a local business or individuals within the school or school district(may include the school secretary, athletic director, school district treasurer, small business enterprise manager and/or supervisor, etc). What are the similarities and differences among the cash controls used by these local businesses or school Administrators. Be sure to contrast cash controls used by businesses with many employees with those that only have a handful of workers, cash controls used by businesses generating lots of income versus those that generate just a small amount of income, etc.- Similarities:
- Differences:
Alternative Assignment
Read the Accounting in the Headlines blog post What Internal Controls Might Have Prevented a SeaWorld Guest Relations Supervisor from Voiding Tickets and Pocketing More Than $116,000?, available at Internal Controls Might Have Saved Thousands. Use the instructor resources and questions on the same to explain what could have prevented the fraud.Cash Control Procedures—Discussion Guide
Slide # 9 THINK ABOUT IT
Cash is commonly referred to as “a company’s most important liquid asset.” An asset is “liquid” if it can be exchanged for another asset without first having to undergo a separate transfer or transaction. For all non-cash assets, being “liquid” usually means that they can be readily exchanged for cash. Because cash is the most basic medium of exchange, it is used in all companies and forms of business. This simple fact means that it must be carefully monitored and managed.
KEY CONCEPTS
Slide #10 The first step in understanding cash controls is understanding what is meant by the term “cash” because, in accounting, cash is more than just paper money and coins.
Cash refers to a range of forms of financial exchange including currency and coin, bank account balances, money orders, and checks.Anything that can be exchanged for other assets in an immediate transaction is considered cash.Slide #11 By definition, cash is valuable and easily/quickly exchanged.
This makes cash very desirable, which can lead to the temptation and risk of fraud or theft.Companies must, therefore, put procedures into place to protect themselves from this kind of misuse.- There are a number of policies and procedures that provide this kind of protection.
- Together they are called cash controls.
- This system ensures that if someone is tempted to steal or deceive, s/he is unable to do so without it being noticed by other people in the company.
- Separating accounting duties also helps catch unintentional errors in the books.
Slide #12 Depending on the size and function of the company, the following duties should either be handled by different people or, at minimum, be reviewed and approved by a person other than the bookkeeper/accountant:
Authorizing- Only certain individuals within an organization should be authorized to handle cash, make deposits or withdrawal transactions in the company’s bank accounts, make authorizing signatures on checks or payments, or grant these authorizations to others.
- The detailed recording of cash receipts and cash disbursements/payments is a critically important cash control procedure.
- Cash receipts are the combined transactions in which a business collects money, and cash disbursements or cash payments are the combined transactions in which a business spends money.
- All documents for these transactions should be stored and the information on them recorded (often in special journals).
- These records should also be kept separate from the physical location of cash, and the same person should not be made responsible for maintaining both the records and the physical cash.
- The detailed recording of cash receipts and cash disbursements/payments is a critically important cash control procedure.
- Reconciliation is the process of comparing information from different sources to ensure that recorded information matches the actual count of the assets or liabilities being recorded.
- Where possible, different individuals should handle recording and reconciliation to ensure that one person is not in charge of both the recording and the checking of those records.
- Documentation of reconciliation should also be maintained.
- Whether in cash registers or safes, the amount of cash on hand should be kept to a minimum relative to the amount that is needed for day-to-day operations.
- Daily bank deposits and frequent cash register maintenance or “drops” help ensure that cash is appropriately accounted for.
- At least two people should always be present when cash is being counted and recorded and when bank deposits are being made.
- Additionally, any blank checks must be secured and access to them should be heavily restricted.
4.4 Explain the purpose of internal accounting controls
4.4 Explain the purpose of internal accounting controls
4.4 Activity
Watch the Video(Rita Crundwell - Fraud in Dixon Illinois : Small Town Shakedown - the fifth estate).
List what internal accounting controls you would create for an organization.
BE Prepared to discuss the internal accounting controls with your class.
Alternative Activity
Read the Accounting in the Headlines blog post Accounting in the Headlines blog post What Internal Controls Might Have Stopped a Cargill Accountant from Embezzling $3.1
Answer the discussion questions about procedures that allowed the Cargill accountant to embezzle the funds, as well as internal controls that might have prevented the theft
Internal Accounting Controls—Discussion Guide
Slide #13 THINK ABOUT IT
Cash controls are just one example of the broader internal accounting controls that companies put in place to protect themselves. Many of the policies and procedures involved in cash controls can be applied to other areas of a business’s accounting practices.
KEY CONCEPTS
Slide #14 Internal accounting controls are policies and procedures that are created and enforced to ensure the reliability of accounting systems.
They are safeguards meant to protect a business’s financial assets and information.- Internal accounting controls serve three main purposes:
- Preventing fraud
- Identifying accounting errors
- Ensuring compliance with financial laws and regulations
Slide #15 Internal controls are like a system of checks and balances for a business.
Some control measures are preventative (aimed at keeping fraud or mistakes from happening), and some are detective (aimed at discovering fraud or mistakes that have already happened).- Both are equally important to ensuring that a business is protected.
- Separation of duties
- Restricted physical and electronic access
- Standardized documentation
- Prior approval and authorization
- Physical audits
- Trial balances
- Reconciliations
- On the other hand, failure to implement these controls can lead to significant, negative consequences including fraud and unreliable financial information.
Slide #16 In accounting, fraud refers to a willful or intentional act to deceive through the misrepresentation or falsification of records. For fraud to occur, the three elements that must exist are:
Perceived need- Perceived need is the pressure or motivation a person has to commit fraud. This motivation may be financial, personal, or professional.
- Rationalization is how the person who commits fraud justifies her/his actions. Research shows that many people who commit fraud are first-time offenders and don’t consider themselves to be criminals.
Perceived opportunity
- Perceived opportunity is the method a person uses to commit fraud.
- It may be a chance to steal cash, divert payments to the wrong account, pass off personal expenses as business expenses, etc.
- Perceived opportunity is the element of fraud in which internal controls have the most impact.
- If both preventative and detective control measures are in place and working, even if the elements of perceived need and rationalization exist, the likelihood of fraud occurring should be largely eliminated.
- Perceived opportunity is the method a person uses to commit fraud.
Slide #17 In addition to fraud, the lack of internal controls can cause a business’s financial information to be unreliable.
Unreliable financial information is a big enough problem on its own, but the additional problems that could result from it can be significant and long-lasting, including:
- Inefficient and wasteful business operations
- The inability to track financial performance
- Poor strategic planning
- Inaccurate financial reports, tax filings, budget projections, etc.
- Noncompliance with laws and regulations (which could result in fines or criminal charges)
- Failed business goals
- Confused employees
- Unhappy customers and investors
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