internal control for cash

Internal Control for Cash

Internal control for cash is important because the volume of cash transactions is enormous with the risk of cash-handling errors significant, and because cash is valuable, portable, and “owned” by the person who possesses it, posing a high risk to theft.

Controls for Cash Receipts

Businesses can receive cash in person at time of sale or from a remote source as payment on an account. The primary internal control goal for cash receipts is to ensure the business receives the appropriate amount of cash and safely deposits it in the bank.

Cash Received in Person

- To properly segregate duties involving cash receipts, specific responsibilities are assigned to employees.

-Segregating duties ensures those who handle the cash do not have access to those who record it.

Cash Received by a Remote Source

Businesses receive checks in the mail when customers pay on account. A clerk opens the mail to account for the transfers.

The mail clerk lists all amounts received on a cash receipt list, which includes the customers’ names and purpose for each payment.
Customer’s payment usually includes a remittance advice
Ideally, someone supervises the clerk to ensure no cash is taken that may have been remitted by a customer. Both the mail clerk and supervisor sign the completed cash receipts list.
The clerk stamps each check “For Deposit Only” to ensure no one diverts the checks for personal use. This also instructs the bank to deposit the check in the company’s account rather than exchange it for cash.
Cash received is separated from the record of cash received. Checks and money orders are given to the person who prepares the bank deposit, and the cash receipts list and remittance advices are sent to the accounting department.
The accounting department then compares the total on the cash receipts list with the deposit slip received from bank. This comparison serves to independently certify that all cash received by mail was deposited in the bank.
The accounting department then uses the cash receipts list to record the journal entries that debit cash and credit accounts receivable form each customer.

Cash received electronically businesses also receive payments from customers via electronic funds transfer (EFT).

An EFT occurs when a customer electronically transfers funds from his or her bank account to the company’s bank account.
EFTs can be encouraged due their ability to speed up collections with them being able to receive EFTs immediately, unlike the 5-7 days it can take to receive mailed payments.
These payments from EFTs are deposited directly into the company’s bank account, eliminating the need for some internal controls.
To process an EFT, the accounting department merely records journal entries to debit cash and credit accounts receivable

Controls for Cash Payments

The primary goal of internal controls for all cash payments is to ensure the business pays only for properly authorized transactions.

Cash Paid by Clerk for Purchases on Account

. Most companies rely on a voucher system, a process for approving and documenting all purchases and payments on account when purchasing goods and services on account.

Begins with a completed manual or electronic purchase requisition form. It is numbered and must be approved by a supervisor; the company has not entered an exchange, so no journal entry is recorded.
After the purchase requisition, the prenumbered purchase order is completed. And sent to the company supplying the foods. A copy is also transmitted to the company’s own accounting department to warn of the impending purchase.
When goods are received, a receiving report is prepared, including the date, quantity, and condition of items returned. A copy is sent to the accounting department to notify them that the goods have been received and the purchase can be recorded.
The supplier sends an invoice and the accounting department will prepare a journal entry to record the purchase of office supplies on account. The supplier invoice will be included with the other documents in a voucher that will be submitted for payment.
The final step is to process a check or EFT to pay for the items purchased and received. The voucher is marked “paid” so it cannot be accidentally or intentionally resubmitted for duplicate payment.

The robotic process automation (RPA) combines automation and artificial intelligence to perform many of these activities without human involvement. Accountants spend more time resolving exceptions in this process rather than executing the basic steps of a voucher system.

Cash Paid to Employees via Electronic Funds Transfer

Most companies pay salaries and wages through EFTs, or direct deposits. It initiates the EFT when it instructs the bank to transfer the pay due each employee directly from the company’s bank account to each employee’s checking account.

It is convenient and efficient as it eliminates the tasks of physically writing and distributing the checks and for the implied has access to the funds without having to deposit a check.
A risk, however, is that the bank might accidentally overpay or underpay an employee by transferring the wrong amount of money out of the company’s bank account.

The imprest system restricts the total amount paid to others by limiting the amount of money available to be transferred.

The company tells the bank to transfer the total net pay of all employees for the pay period out of the company’s general bank account and into a special payroll account established for that purpose.
The bank transfers the individual amounts from the payroll account to the employees checking accounts.
If the transfer occurs without error, the special payroll account should equal zero after paying all the employees.
If the account is overdrawn or a balance remains, the company knows an error has occurred.

Cash Paid to Reimburse Employees (Petty Cash)

To avoid the time and cost of writing checks for business expenses that are small in amount, organizations may use a petty cash fund.

A petty cash fund is a system to reimburse employees for expenditures they have made on behalf of the organization.
It acts as a control by establishing a limited amount of cash to use for specific types of expenses.
The company removes cash from its general bank account to hold at its premises in a locked cash box.
The custodian is responsible for operating the petty cash fund. Because they have access to cash, they should be supervised and the petty cash fund should have surprise audits.