LO1 – Define internal control and explain how it is applied to cash.
The purpose of internal controls is to safeguard the assets of a business. Since cash is a particularly vulnerable asset, policies and procedures specific to cash need to be implemented, such as the use of cheques and electronic funds transfer for payments, daily cash deposits into a financial institution, and the preparation of bank reconciliations.
LO2 – Explain and journalize petty cash transactions.
A petty cash fund is used to pay small, irregular amounts for which issuing a cheque would be inefficient. A petty cash custodian administers the fund by obtaining a cheque from the cash payments clerk. The cheque is cashed and the coin and currency placed in a locked box. The petty cash custodian collects receipts and reimburses individuals for the related amounts. When the petty cash fund is replenished, the receipts are compiled and submitted for entry in the accounting records so that a replacement cheque can be issued and cashed.
LO3 – Explain the purpose of and prepare a bank reconciliation, and record related adjustments.
A bank reconciliation is a form of internal control that reconciles the bank statement balance to the general ledger Cash account, also known as the general ledger balance. Reconciling items that affect the bank statement balance are outstanding deposits, outstanding cheques, and bank errors. Reconciling items that affect the general ledger Cash balance are collections made by the bank on behalf of the company, NSF cheques, bank service charges, and errors. Once the book and bank statement balances are reconciled, an adjusting entry is prepared based on the reconciling items affecting the general ledger balance.
LO4 – Explain, calculate, and record estimated uncollectible accounts receivable and subsequent write-offs and recoveries.
Not all accounts receivable are collected, resulting in uncollectible accounts. Because it is not known which receivables will become uncollectible, the allowance approach is used to match the cost of estimated uncollectible accounts to the period in which the related revenue was generated. The adjusting entry to record estimated uncollectible amounts is a debit to the Bad Debt Expense general ledger account and a credit to the Allowance for Doubtful Accounts account. The income statement method and the balance sheet method are two ways to estimate and apply the allowance approach. The income statement method calculates bad debt expense based on a percentage of credit sales while the balance sheet method calculates total estimated uncollectible accounts in the Allowance for Doubtful Accounts using an aging analysis. When receivables are identified as being uncollectible, they are written off. If write-offs subsequently become collectible, a recovery is recorded using two entries: by reversing the write-off (or the portion that is recoverable), then recording the cash receipt.
LO5 – Explain and record short-term notes receivable and calculate related interest.
A short-term note receivable is a promissory note that bears an interest rate calculated over the term of the note. Short-term notes receivable are considered current assets if they mature within twelve months from the date of issue. Notes can be issued to a customer at the time of sale, or a note receivable can replace an overdue account receivable.
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