Revision Notes
Revision Notes: Accounting for Internal Control
These condensed notes cover the three main topics of Form 5 Chapter 3 (Cash Control, Bank Reconciliation and Cash Budget) for quick revision before examinations.
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Cash Control: Purposes
- Cash is the most liquid asset and the easiest to misuse, so cash control is vital to protect it from theft, loss and misappropriation.
- To ensure every receipt is recorded accurately and every payment is valid and supported by source documents.
- To prevent wastage and misuse of the business's cash by employees or other parties.
- To provide an accurate picture of the cash position to support decision-making and cash-flow planning.
Methods of Cash Control
- Separation of duties: the person who receives cash is not the one who records or pays it.
- Keep cash in a safe place and bank collections promptly (daily banking).
- Make payments by cheque or electronic banking and use a petty cash imprest system for small expenses.
- Prepare a Bank Reconciliation Statement regularly and audit and check cash records.
Bank Statement & Purpose of the Bank Reconciliation Statement
- Function of the Bank Statement: a document issued by the bank showing all account transactions (deposits, withdrawals, charges) and the customer's balance for a period.
- Purpose of the Bank Reconciliation Statement: to reconcile the Bank Account balance in the Cash Book with the Bank Statement balance so differences can be identified and explained.
- To help detect recording errors made in the Cash Book or by the bank, and possible fraud.
- To ensure the correct cash-at-bank balance is recorded in the financial statements.
Reasons for Differences Between the Cash Book and Bank Statement
- Items in the Cash Book but not yet in the Bank Statement: unpresented cheques (paid out but not yet cashed) and cheques/deposits not yet credited (banked but not yet processed).
- Items in the Bank Statement but not yet in the Cash Book: bank charges, overdraft interest, interest received, dividends collected by the bank, standing orders and direct debits, and dishonoured cheques.
- Differences on the same transaction: recording errors such as wrong amounts, wrong side, or omissions, either by the business or the bank.
Steps to Prepare the Bank Reconciliation Statement
- If the Cash Book is updated: compare the Cash Book with the Bank Statement, then enter items appearing only in the Bank Statement (bank charges, interest, standing orders, dishonoured cheques) into the Cash Book to obtain the updated balance.
- Start the statement with the updated Cash Book balance: add unpresented cheques and deduct cheques/deposits not yet credited to arrive at the Bank Statement balance.
- If the Cash Book is not updated: start with the original Cash Book balance and adjust all items (including bank charges and interest) within the statement only until it equals the Bank Statement balance.
- Note the effect of an overdraft: an overdraft balance is treated as negative, so the add/deduct direction for unpresented cheques and uncredited deposits is reversed compared with a positive balance.
Cash Budget: Importance & Terms
- Importance: to plan cash inflows and outflows, to spot cash surplus or shortage early, and to support decisions such as borrowing or investing.
- Receipts = estimated cash inflows (e.g. cash sales, receipts from debtors, capital); Payments = estimated cash outflows (e.g. cash purchases, salaries, rent, capital expenditure).
- A surplus occurs when total cash available exceeds payments (positive closing balance); a shortage occurs when payments exceed cash available (negative closing balance).
- Comparison with actual: actual receipts above expected means better collection performance, and vice versa; actual payments above expected means overspending, while the reverse shows savings.
- A Cash Budget can be prepared manually or using ICT applications such as spreadsheets that use formulas to compute each month's balance.
| Particulars | RM |
|---|---|
| Balance as per Cash Book (updated) | 5,000 |
| Add: Unpresented cheques | 1,200 |
| 6,200 | |
| Less: Cheques/deposits not yet credited | 800 |
| Balance as per Bank Statement | 5,400 |
All bank charges, interest and standing orders were first entered in the Cash Book.
| Particulars | January (RM) | February (RM) |
|---|---|---|
| Opening cash balance (b/d) | 2,000 | 4,000 |
| Receipts | ||
| Cash sales | 8,000 | 7,000 |
| Receipts from debtors | 3,000 | 3,000 |
| Total receipts | 11,000 | 10,000 |
| Total cash available | 13,000 | 14,000 |
| Payments | ||
| Cash purchases | 6,000 | 6,000 |
| Salaries | 2,000 | 2,000 |
| Rent | 1,000 | 1,000 |
| Total payments | 9,000 | 9,000 |
| Closing cash balance (c/d) | 4,000 | 5,000 |
This month's closing balance becomes next month's opening balance.
What is the difference between an unpresented cheque and a cheque not yet credited?
An unpresented cheque is one that has been paid out and recorded in the Cash Book but not yet cashed by the payee, so it does not yet appear in the Bank Statement. A cheque not yet credited is a cheque/deposit banked and recorded in the Cash Book but not yet processed by the bank.
Why are bank charges and interest entered into the Cash Book and not only in the statement?
These items are known from the Bank Statement but not yet recorded by the business. They must be entered in the Cash Book so that the updated balance shows the true cash position. The 'without updating' method instead adjusts these items within the statement only.
How do you determine whether there is a surplus or a shortage in a Cash Budget?
Compute total cash available (opening balance plus total receipts), then deduct total payments. A positive result shows a surplus (positive closing balance); a negative result shows a shortage and the business may need to obtain additional cash.
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