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Lecture 5

COMMERCE 1AA3 Lecture Notes - Lecture 5: Internal Control, Bank Statement, Accounts Receivable


Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Aadil Merali Juma
Lecture
5

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Chapter 4- Cash and Receivables
Internal Controls
Primary way fraud and errors are:
Prevented
Detected or
Corrected
Management and Board of Directors implement a:
Plan of organization
System of procedures
Objectives of Internal Controls
Internal Control of Cash
Internal control refers to policies and procedures that are designed to:
o Properly account for assets
o Safeguard assets
o Ensure accuracy of financial records
Cash is the most susceptible asset to theft and fraud
1. Smart Hiring and Separation of Duties
Each person in the information chain is important.
The chain starts with hiring
Background checks
Proper training and supervision
Paying competitive salaries
Then responsibilities should be clearly laid out in position descriptions
Smart Hiring Practices
Separation of Duties
o Asset handling
o Record keeping
o Transaction approval
To ensure accurate cash records, you need to update your cash record- either online
or after you receive your bank statement. The result of this updating process allows

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you to prepare a bank reconciliation. The bank reconciliation explains all differences
between your cash records and your bank statement balance.
Each bank reconciliation has two sides: the bank statement and the company’s (book)
side
On the bank side of the reconciliation account for items reflected the books, but not in
the bank statement:
o Deposits in transit
o Outstanding cheques: cheques given out, but not cashed yet.
o Errors
On the book’s side of the reconciliation account for items reflected in the bank
statement, but not in the company’s books:
o EFT and bank credits
o Bank charges
Cash balance per books is rarely equal to the cash balance per bank statement
A bank reconciliation identifies the reasons for the difference
The person who prepares a company’s bank reconciliation should have no other cash
duties and be independent of cash activities. Otherwise, he or she can steal cash and
manipulate the reconciliation to conceal the theft.
Causes of Differences
Deposits in Transit- Business’ make overnight deposits in bank dropboxes. If a company
deposits $20,000 on September 30th, the bank statement for the month of September
will NOT reflect that deposit. That’s what we call deposits in transit. Add deposits in
transit on the bank reconciliation.
Outstanding Cheques- On June 15th, a company issues a check of 10,000 to a supplier.
The supplier cashes the cheque on July 5th. The bank statement for June will NOT show
that cheque. Subtract outstanding cheques.
Bank Charges
Bank Credits Electronic Transfers of Funds (ETF) take place when the bank collects on
behalf the company and deposits the collection in the company’s account. The
company’s books will not reflect ETFs until the bank statement is received.
Bank or Depositor Errors
Bank Reconciliation Format
Section A
Balance per books
Add: Amounts collected by the bank on behalf of the company
Deduct: Bank service charges
Checks returned for insufficient funds from customers
Adjusted balance per books
Section B
Balance per bank

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Add: Deposits not recorded by the bank
Deduct: Outstanding checks
Adjusted balance per bank
Bank Reconciliation Illustrated
The bank statement of Nixon Partners Inc. shows a balance of $5,931.51 on January 31. The
company Cash account on the books has a balance of $3,294.21. The following reconciling
items explain why the two balances differ.
The Bank Reconciliation Illustrated
Bank Side
1. Deposit a transit: $1,591.63
2. Bank error: the bank deducted $100.00 for a cheque written by another company. Add
$100.00 to the bank balance.
3. Outstanding cheques- total of $1,350.14
The Bank Reconciliation Illustrated (1 of 2)
The Bank Reconciliation Illustrated
Book side
4. EFT receipt of your rent revenue earned on an investment: $904.03.
5. Bank collection of your note receivable including interest of $214.00: $2114.00.
6. Interest revenue earned on your bank balance: $28.01
7. Book error: You recorded cheque no. 333 for $510. The amount you actually paid on account
was $150.00. Add $360 to book balance. The actual cheque is 150. The cash account should
have been reduced to 150. The transaction is recorded is 150. That means they reduced the
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