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Cashcontrol

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  • 1. Internal Control and Cash
    • Nayyar R. Kazmi
  • 2. Accounting transactions are recorded in a set of books. The following are referred to as the principal books of account: 1) Journal: The Journal contains details of transactions (other than those relating to receipts or payments in cash or through bank), recorded in chronological order. Journal Credit (Rs.) Debit (Rs.) L/F Particulars Date
  • 3.
    • Ledger : The Ledger contains separate accounts for every type of income, expense, asset, liability and every person/ organisation with whom any transactions have taken place. An account is a summary of all transactions taking place under that head.
    Amount (Rs.) J/F Particulars Date Amount (Rs.) J/F Particulars Date Cr. Dr.
  • 4. Debit and Credit All amounts recorded in the books of account are placed either to the debit or credit of an account. For any transaction, which account(s) should be debited and which should be credited is determined by the following rule: DEBIT what comes in, CREDIT what goes out DEBIT the receiver, CREDIT the giver DEBIT all expenses and losses, CREDIT all incomes and gains The implications of amounts being placed to the debit or credit of an account are as follows: An asset has been disposed or a liability has been incurred An asset has been acquired or a liability has been paid/ reduced c) Asset/ Liability An income or a profit has been earned An expense or a loss has been incurred b) Income/ Expenditure The individual/ firm has given some money or other tangible benefit The individual/ firm has received some money or other tangible benefit a) Personal Credit Debit Implication Type of Account
  • 5.  
  • 6. Accounting Process After each transaction At the end of the year Posting into Ledger  Recording in Journal/ Cash and Bank Book  Generation of Voucher  Recording in Subsidiary Book (if applicable)  Transaction Compilation of Profit & Loss Account and Balance Sheet  Adjustments and Finalisation Entries  Generation of Trial Balance  Balancing of Ledger/ Cash and Bank Book
  • 7. Internal Control
    • Policies and procedures for protecting assets from improper use
  • 8. Internal Control
    • Policies and procedures for protecting assets from improper use and for the detection and prevention of errors or irregularities in accounting
  • 9. Elements of the Internal Control Structure
    • Control Environment
    • Accounting System
    • Control Procedures
  • 10. Control Environment
    • Management’s philosophy and operating style
    • Organizational structure
    • Audit committee of board of directors
    • Assigning authority and responsibility
    • Controlling performance
    • Policies and practices
  • 11. Accounting System
    • Identification and recording of all valid transactions
    • Proper classification of transactions
    • Proper measurement of dollar amount
    • Assignment to proper period
    • Proper presentation in financial statements and notes
  • 12. Control Procedures
    • Proper authorization of transactions and activities
    • Separation of duties
    • Documents and records
    • Safeguard over access to assets and records
    • Review of internal control system
  • 13. Cash
    • Deposits in checking and savings accounts and any item bank customarily accepts for immediate deposit
    • Challenge is to control inflows and outflows of cash
  • 14. Internal Control of Cash
    • Clear separation of duties and responsibilities among those who handle and account for cash
    • Proper equipment
    • Proper authorization for payment
    • Organization of flow so that work of one person checked by another
    • Periodic testing of controls
  • 15. Petty Cash Fund
    • Special fund of cash used for small payments
    • Establishment
      • Imprest amount debited to asset account Petty Cash
  • 16. Petty Cash Fund
    • Expenditures
      • No entry
      • Evidenced by petty cash voucher
    • Replenishment
      • Check written to bring fund back to imprest amount
      • Record expenses evidenced by petty cash vouchers
  • 17. Petty Cash Fund
    • Cash Over and Short
      • When amount to replenish does not equal vouchers
  • 18. Bank Checking Account
    • Monthly bank statement conceptually a mirror image of company’s cash account
    • Timing differences in recording of deposits and clearing of checks causes difference in balance between bank and books.
    • Requires reconciliation
  • 19. Bank Reconciliation
    • Uses a record of an independent organization to prove the company’s records
    • Shows the items that account for the difference between Cash account balance and bank statement balance.
  • 20. Bank Reconciliation Procedures
    • Compare deposits shown on bank statement with debits to Cash
      • Deposits late in period not on bank statement are deposits in transit
    • Compare checks clearing bank with credits to Cash
      • Checks not clearing bank are checks outstanding
  • 21. Bank Reconciliation Procedures
    • Compare bank debit and credit memos to books to see if they have been recorded
    • List any errors as amounts are compared
  • 22. Bank Reconciliation Per Books
    • Add increases in cash already recorded by bank but not book
    • Deduct decreases in cash already recorded by bank but not book
    • Add or deduct errors on books
  • 23. Bank Reconciliation Per Bank
    • Add increases in cash recorded on book but not bank
      • Deposits in transit
    • Deduct decreases in cash already recorded on books but not bank
      • Checks outstanding
    • Add or deduct errors by bank
  • 24. Bank Reconciliation
    • Journalize reconciling items from book side not recorded
    • Reconciliation not complete until all items have cleared
    • May take several months before we know that a specific month’s adjusted balance is in fact correct
  • 25. Analyzing Information
    • Is balance higher or lower than previous year?
    • What restrictions exist on cash?
      • Compensating balances
    • Where is cash invested?
  • 26. Comprehensive Analysis Case: Income Statement
    • Are total revenues higher or lower?
    • What is percent change in revenues?
    • Is percent of cost of goods sold to total revenues increasing or decreasing?
    • Is percent of total operating expenses to total revenues increasing or decreasing?
    • Is percent of net income to total revenues increasing or decreasing?
  • 27. Comprehensive Analysis Case: Balance Sheet
    • Are total assets higher or lower?
    • What is percent change in total assets?
    • What are largest asset investments?
    • Are largest asset investments increasing faster or slower than percent change in total revenues?
    • Is percent total liabilities to total liabilities plus owners’ equity increasing or decreasing?
  • 28. Comprehensive Analysis Case: Integrative
    • Is the company operating more or less efficiently using the least amount of assets to generate a given level of total revenues
    • Compute total asset turnover
  • 29. Comp. Analysis Case: Short-term Liquidity Ratios
    • Current ratio
    • Quick ratio
    • Accounts receivable turnover
    • Inventory turnover
    • Is ration better or worse than previous year?
  • 30. Comp. Analysis Case: Profitability Ratio
    • Return on total assets
      • Profit margin
      • Total asset turnover
    • Is ROA better or worse than prior years?
  • 31.