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Explain The Application of Internal Control Principles To Cash Receipts

The document provides examples of internal controls over cash receipts and cash disbursements. It then gives a scenario about a restaurant owner's concerns over cash receipts controls and recommends assigning a separate cash register to each employee and comparing register totals to orders. It also includes journal entries to establish and replenish a petty cash fund and to reconcile a bank statement.

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Muntasir Ahmmed
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145 views

Explain The Application of Internal Control Principles To Cash Receipts

The document provides examples of internal controls over cash receipts and cash disbursements. It then gives a scenario about a restaurant owner's concerns over cash receipts controls and recommends assigning a separate cash register to each employee and comparing register totals to orders. It also includes journal entries to establish and replenish a petty cash fund and to reconcile a bank statement.

Uploaded by

Muntasir Ahmmed
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Tutorial

1. Explain the application of internal control principles to cash receipts.


Internal controls over cash receipts include:
(a) Designating specific personnel to handle cash;
(b) Assigning different individuals to receive cash, record cash, and maintain custody
of cash;
(c) Using remittance advices for mail receipts, cash register tapes for over-the-
counter receipts, and deposit slips for bank deposits;
(d) Using company safes and bank vaults to store cash with access limited to
authorized personnel, and using cash registers in executing over-the-counter
receipts;
(e) Making independent daily counts of register receipts and daily comparison of
total receipts with total deposits; and
(f) Bonding personnel that handle cash and requiring them to take vacations.

2. Explain the application of internal control principles to cash


disbursements.
Internal controls over cash disbursements include:

(a) Having specific individuals such as the treasurer authorized to sign checks and
approve invoices;

(b) Assigning different individuals to approve items for payment, pay the items, and
record the payment;

(c) Using pre-numbered checks and accounting for all checks, with each check
supported by an approved invoice;

(d) Storing blank checks in a safe or vault with access restricted to authorized
personnel, and using a check-writing machine to imprint amounts on checks;

(e) Comparing each check with the approved invoice before issuing the check, and
making monthly reconciliations of bank and book balances; and
(f) Bonding personnel who handle cash, requiring employees to take vacations, and
conducting background checks.

3. L. R. Cortez is concerned about the control over cash receipts in his fast-
food restaurant, Big Cheese. The restaurant has two cash registers. At no
time do more than two employees take customer orders and ring up sales.
Work shifts for employees range from 4 to 8 hours. Cortez asks your help
in installing a good system of internal control over cash receipts.
Cortez should assign a cash register to each employee at the start of each work shift,
with register totals set at zero. Each employee should be instructed to use only the
assigned register and to ring up all sales. Each customer should be given a receipt. At
the end of the shift, the employee should do a cash count. A separate employee should
compare the cash count with the register tape, to be sure they agree. In addition, Cortez
should install an automated system that would enable the company to compare orders
rung up on the register to orders processed by the kitchen.

4. Bateer Company established a $50 petty cash fund on July 1. On July 30,
the fund had $12 cash remaining and petty cash receipts for postage $14,
office supplies $10, and delivery expense $15. Prepare journal entries to
establish the fund on July 1 and to replenish the fund on July 30.
Date Accounts Name & Explanation Debit Credit
July 1 Petty cash 50
Cash 50
(To establish petty cash fund)
July Postage Expense 14
30 Office Supplies 10
Delivery Expense 15
Cash over and short 1
Cash ($50-$12) 38
(To replenish petty cash)
5. Poorten Company’s bank statement for May 2010 shows the following
data.
Balance 5/1 $ 12,650
Debit memorandum:
NSF check $175
Balance 5/31 $14,280
Credit memorandum:
Collection of note receivable $ 505
The cash balance per books at May 31 is $13,319. Your review of the data reveals the
following.
1. The NSF check was from Copple Co., a customer.
2. The note collected by the bank was a $500, 3-month, 12% note. The bank charged a
$10 collection fee. No interest has been accrued.
3. Outstanding checks at May 31 total $2,410.
4. Deposits in transit at May 31 total $1,752.
5. A Poorten Company check for $352, dated May 10, cleared the bank on May 25. The
company recorded this check, which was a payment on account, for $325.

Instructions
(a) Prepare a bank reconciliation at May 31.
Poorten Company’s
Bank Reconciliation
May 31, 2010
Cash balance per bank statement $14,280
+ Deposits in transit $1,752
16,032
- Outstanding Checks $2,410
Adjusted cash balance per bank: $13,622

Cash balance per books $13,319


+ Collection of note receivable $500+ $15(interest)- $10(collection $505
fee)1
$13,824
- NSF Check $175
Error in recording check2 27 ($202)
Adjusted cash balance per books: 13,622
1
(500X0.12)*3/12
2
(352-325)

(b) Journalize the entries required by the reconciliation.

Dat Accounts Name & Explanation Debit Credit


e
May Cash 505
31 Miscellaneous Expense 10
Notes Receivable 500
Interest Revenue 15
(To record collection of note by bank)
May Accounts Receivable-Copple co. 175
31 Cash 175
(To record NSF Check from Copple co.)
May Accounts Payable 27
31 Cash 27
(To record error in recording check)

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