Cash Controls

Cash Receipts Procedures

Cash Receipts via In-Person Retail Sales

Controlling cash received from sales is a nine-step process that protects cash and its handlers.

As the most liquid of assets, cash is also most susceptible for theft or misuse. Consequently, there should be adequate controls in place to protect cash from being used inappropriately or stolen. The controls protect cash from its receipt until it is deposited in the bank. Traditionally, businesses receive cash from customers buying goods or services, or they receive cash from customers paying on their account.

To control cash receipts from customers who have purchased goods or services, a cash register is needed to record the sale, keep cash more secure, and provide receipts to customers. Controlling cash receipts involves nine steps.

Step 1: The use of a change fund is important for controlling the cash receipts from customers. The change fund, as the name implies, is an amount of cash used to provide change to customers; the amount of the fund is determined by the business. It can range from as little as $50 to as much as the company's needs dictate.

Step 2: The sales clerk enters the sale in the cash register. The cash register will show the amount of the sale, and the customer will be presented with a receipt detailing the transaction to ensure accuracy.

Step 3: At the end of the shift, the amount of cash in the drawer is verified by the clerk and the supervisor; it should be equal to the cash sales plus the initial change fund amount.

Step 4: The cash will be forwarded to the cashier's office by the supervisor.

Step 5: For safekeeping, the cash is secured in a safe or vault. The supervisor will also take the cash register receipts to the accounting department for recording.

Step 6: The cashier prepares the bank deposit.

Step 7: The cashier deposits the cash in the bank.

Step 8: Once the cash has been deposited, the accounting department will record the cash sales for the day.

Step 9: The accounting department compares the amount of cash register receipts from Step 5 with the bank receipt. Any differences in cash deposited and cash sales will be recorded in cash short and over account, used to record the shortages and overages in cash balances. Categorized as an expense, the cash short and over account is debited if the cash deposited is less than cash sales. It is credited if the cash deposited is greater than cash sales.

Segregation of duties is also an important element of keeping cash receipts secure. For example, the employee responsible for using the register to collect cash from customers should not be the same employee that tallies the register receipts and verifies the count of cash in the register. If duties are separated, employees are less likely to be able to steal cash from the register.
Cash controls of cash payments should be in place to protect cash, as it is a portable asset and most susceptible to theft or misuse.

Cash Receipts via Mail

Cash received in the mail uses a remittance advice slip to aid in controlling cash. Controlling cash received by electronic funds transfer (EFT) requires an authorized release of funds.

Business entities also receive cash in the mail from customers making payments on their accounts. From an accounting standpoint, checks and money orders are also considered cash. Payments received via mail are usually accompanied with a remittance advice, a form containing information about the amount paid, such as invoice number, amount remitted, and total invoice amount. The remittance advice is issued by the company and is usually included when sending the invoice to the customer. It also aids in controlling the cash received by mail and acts as a record of cash received. When using the remittance advice to control cash received in the mail, business employees must adhere to the following eight steps.

Step 1: All incoming mail is opened, and the remittance advice is compared with the cash received from the customer. This step verifies the cash received and ensures that the customer account is updated with an accurate payment amount. In the event that the customer did not enclose a remittance advice, one is prepared on their behalf.

Step 2: All checks and money orders received are stamped "For Deposit Only" and include the bank account number to which the deposit will be made. Otherwise, the checks might be cashed or signed over to another person or company.

Step 3: The remittance advices are forwarded to the accounting department for additional verification. See Step 8.

Step 4: The cash and money orders are forwarded to the cashier's department.

Step 5: The bank deposit ticket is prepared by the cashier.

Step 6: The cash is deposited in the bank by the cashier, who obtains a receipt from the bank teller.

Step 7: The cash received is recorded, and customer accounts are updated by the accounting clerk.

Step 8: Once the cash has been deposited in the bank, a duplicate deposit ticket is forwarded to the accounting department to verify the amount deposited as compared with the amount received.

Equally as important as verifying the cash received, the separation or segregation of duties is imperative to confirm that proper controls are in place to protect cash received. The duties of the cashier's department should be distinct and separate from those of the accounting department to avoid collusion among employees to steal or mishandle the cash and tarnish the accounting records. Another example of separation of duties includes one person opening the mail and a different person preparing the bank deposit. This reduces the possibility of someone not counting cash that has arrived in the mail.

An electronic funds transfer (EFT), the electronic transfer of funds from one financial institution to another, is an additional way that business entities receive cash from customers. Using an EFT is an attractive alternative to cash receipts via mail because of its cost-effective nature. The use of EFTs is preferable because cash is not handled by employees and the number of late payments decreases with the use of EFTs. An EFT requires a signed authorization to be forwarded to the customer's financial institution, notifying them of the electronic transfer, its frequency if it is recurring, and the date the transfer is to be made. On a regular basis, such as daily, weekly or monthly, the accountant accesses the company's bank records and updates the accounting records with the date the electronic transfer occurs, the amount, and the source of each EFT.

Cash Payments

The voucher system is used to manage authorization of payments to vendors and other creditors. Electronic funds transfer (EFT) can be used to pay employees, vendors, and others, and it requires proper authorization by the company.
The purchase of goods and services and payment to creditors are two of the reasons that cash payments would be authorized within a business entity. Dividends and other expenses as incurred are two additional examples. The control of cash payments is just as important as the control of cash receipts. Ideally, the control of cash payments will ensure cash payments are properly authorized and will allow the company to rely on the effective and efficient use of cash. To do so, it is imperative that purchases are authorized, goods received are inspected, and invoices are verified before payments are authorized. The use of a voucher system aids business entities in achieving control of cash payments. Defined as a system used to document payment authorizations, the voucher system relies on vouchers. A voucher is a form used to document and verify payment authorizations in order to achieve control of cash payments.

Voucher for Cash Payments

To document payment authorizations, vouchers are used to control cash payments.
The voucher system mandates that the appropriate documents (purchase order, receiving report, and invoice) are matched before authorizing payment of the invoice. The purchase order confirms that the initial purchase was authorized by the company and obtained from an approved vendor. The receiving report is necessary to confirm the goods were received. The invoice is confirmation that the vendor agrees with the company's records. Approved vouchers are attached to the purchase order, receiving report, and invoice; indicate the due date of the payment; and support authorized payments.

To finalize the process, checks are mailed to the respective creditors, and the voucher is placed in the paid voucher file. Checks serve as a record of payment, but they should be signed by an authorized company representative and supported by evidence (purchase order, receiving report, and invoice). Some organizations require two signatures for checks over a certain dollar threshold as an added security measure. Without sufficient evidence, payment cannot be made.

Cash payments can also be paid using electronic funds transfer (EFT). EFT payments can occur via direct deposit, wire transfers, electronic checks, pay-by-phone systems, and personal computer banking. Funds transferred by direct deposit are deposited directly into a bank account, reducing risk of theft or loss of a paper check. Paychecks and refunds deposited directly are usually available immediately. Wire transfers can move funds between a network of financial institutions locally and internationally for a fee. An electronic check, or e-check, is a type of EFT that has advantages over paper checks, including lower costs and no postage fees, lower risk of theft or loss, and more authentication for security. Regardless of the EFT method used, all EFTs must be authorized. Business entities frequently use EFTs to compensate their employees and pay creditors. Proper authorizations initiate EFT payments for employees and creditors.

Petty Cash

Petty cash, a special-purpose fund, requires close cash controls.

Business entities frequently incur costs for small expenditures such as postage, office supplies, coffee, and other incidentals. To avoid having to write a check for these, businesses utilize special-purpose funds. A special-purpose fund includes funds that have been set aside for special business needs. A petty cash fund is a commonly used special-purpose fund used for small business expenses to avoid writing checks. Once the desired amount of the petty cash fund is determined, a check is written and cashed usually by one of the accounting staff. The cash is then given to an employee deemed the custodian of the petty cash fund. A petty cash fund is most often a box or small safe that holds the cash together with receipts for expenses paid from the fund. Monies from the petty cash fund will be disbursed by the petty cash custodian to employees who require cash to pay for minor expenses. After funds have been disbursed, employees return with receipts for the expenses to the petty cash custodian. The custodian will maintain a detailed record of all cash used via the petty cash receipts form. At any point in time, the total cash in the fund plus the receipts for expenses paid will equal the total amount of the cash fund when the fund was established.

In order to replenish the petty cash fund for the cash paid out, the petty cash custodian will summarize the petty cash receipts, journalize the transactions, and write a check made out to cash.

To establish the petty cash fund in the amount of $400 on May 1, a journal entry is recorded.

Journal Entry to Establish Petty Cash Fund

Date Description Debit Credit
May 1 Petty cash $400
     Cash $400
To establish the petty cash fund

By the end of May, the petty cash receipts indicate that the fund needs to be replenished for expenses.

Expenses to Be Paid by Petty Cash Fund

Office supplies $120
Miscellaneous administrative expenses $40
Total $160

Given that there is $160 of expenditures, the amount of cash on hand in the petty cash should be $240. The petty cash receipts of $160 plus the actual cash of $240 equals the original amount of petty cash in the accounting records of $400. In the event that the amount of cash is more or less than $240, the cash short and over account should be utilized to document the difference. If cash is short, the business will need to debit the cash short and over account (a similar function to an expense account). If cash is over, the business will need to credit the cash short and over account (a similar function to a revenue account). Cash overages and shortages should be very minimal, and if the amounts are greater than the company's tolerance level, the petty cash custodian will be held accountable.

A journal entry is made to replenish the petty cash fund on May 30.

Journal Entry to Replenish Petty Cash Fund

Date Description Debit Credit
May 30 Office supplies $120
Miscellaneous administrative expenses $40
        Cash $160
To replenish the petty cash fund

The $160 of cash credited in the journal entry represents a check written out and cashed, and then the cash is placed in the petty cash fund, bringing the actual cash on hand to the original $400.

After the petty cash fund has been established, it should not be debited in the records again unless the amount of the fund needs to be increased. The amount of the fund should not be credited unless the fund amount needs to be decreased.

A journal entry is made to increase the petty cash fund from $400 to $600.

Journal Entry to Increase Petty Cash Fund

Date Description Debit Credit
May 30 Petty cash $200
     Cash $200
To increase the petty cash fund

A journal entry to decrease the petty cash fund from $600 to $350 is required.

Journal Entry to Decrease Petty Cash Fund

Date Description Debit Credit
May 30 Cash $250
     Petty cash $250
To decrease the petty cash fund