Cash Receipts Procedures

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.

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.

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.

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.