Cash Controls
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Cash and Internal Controls
Since cash is the most liquid of all assets, a business cannot survive and prosper if it does not have adequate control over its cash. Cash is the asset that has the greatest chance of “going missing” and this is why we must ensure that we have strong internal controls build around the cash process. Since many business transactions involve cash, it is a vital factor in the operation of a business. Of all the company’s assets, cash is the most easily mishandled either through theft or carelessness.
To control and manage its cash, a company should:
- Account for all cash transactions accurately so that correct information is available regarding cash flows and balances.
- Make certain that enough cash is available to pay bills as they come due.
- Avoid holding too much idle cash because excess cash could be invested to generate income, such as interest.
- Prevent loss of cash due to theft or fraud.
When a company sells its products or services, it may receive cash immediately or several days or weeks later (payment on account).A cash sale is when an employee receives the cash immediately over the counter, records it, and places it in a cash register.The presence of the customer as the sale is rung up usually ensures that the cashier enters the correct amount of the sale in the cash register. At the end of each day, stores reconcile the cash in each cash register with the cash register tape or computer printout for that register. Payments received later (payments on account) are in the form of checks or nowadays online payments. The business prepare a record of the checks received as soon as they are received. Some companies have customers send the payments directly to the bank instead of the company itself.
Although businesses vary their specific procedures for controlling cash receipts, they usually observe the following cash receipts principles:
- Prepare a record of all cash receipts as soon as cash is received. Most thefts of cash occur before a record is made of the receipt. Once a record is made, it is easier to trace a theft.
- Deposit all cash receipts intact as soon as feasible, preferably on the day they are received or on the next business day. Undeposited cash is more susceptible to misappropriation.
- If possible, arrange duties so that the employee who handles cash receipts does not record the receipts in the accounting records. This control feature follows the general principle of segregation of duties.
- Again if possible, arrange duties so that the employee who receives the cash does not disburse the cash.
Companies also need controls over cash disbursements. Since a company spends most of its cash by check or nowadays online payments, many of the internal controls for cash disbursements deal with checks and authorizations for cash payments. The basic principle of segregation of duties also applies in controlling cash disbursements.
Following are some basic control procedures for cash disbursements:
- Make all disbursements by check or from petty cash.
- Obtain proper approval for all disbursements and create a permanent record of each disbursement.
- Require all checks to be serially numbered and limit access to checks to employees authorized to write checks.
- Require two signatures on each check over a material amount so that one person cannot withdraw funds from the bank account.
- Arrange duties so that the employee who authorizes payment of a bill does not sign checks. Otherwise, the checks could be written to friends in payment of fictitious invoices.
- Require approved documents to support all checks issued.
- Instruct the employee authorizing cash disbursements to make certain that payment is for a legitimate purpose, is made out for the exact amount, and to the proper party.
- Stamp the supporting documents paid when liabilities are paid and indicate the date and number of the check issued. These procedures lessen the chance of paying the same debt more than once.
- Arrange duties so that those employees who receive cash or sign checks neither have access to canceled checks nor prepare the bank reconciliation. This policy makes it more difficult for an employee to conceal a theft.
- Have an employee who has no other cash duties prepare the bank reconciliation each month, so that errors and shortages can be discovered quickly.
- Void all checks incorrectly prepared. Mark these checks void and retain them to prevent unauthorized use.
For those that want to learn more about cash and cash controls check out my Cash Tutorial.
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