There is no asset with higher inherent risk of theft than cash.
Because of this it is important to have strong internal controls in place to protect
cash receipts and payments.
Let's start by looking at the controls over cash receipts over the counter.
When companies sell goods for cash over the counter like in a retail setting they are at risk of theft.
In order to prevent this they use the following control procedures:
Receipts are issued for each transaction,
this creates electronic paper trail of how much cash was received at the register. At any
point the actual cash on hand can be compared to the receipt record to see if they are in balance.
Without receipts a customer could buy the goods and the cashier never rings up the order and just pockets the cash.
If you ever see a fast food restaurant with a sign that says something like, "your meal is free if you didn't get a receipt,"
you'll know this is why they are doing that, to make sure their cashiers are ringing up every order.
The cash drawer is opened only when a transaction is entered.
Often this is overlooked as a control procedure but cash isn't kept on the counter
out in the open but rather locked up in a register and it's only opened when transactions happen.
Otherwise every checkout line would look like a banker in a monopoly game and chaos would ensue.
At the end of the day actual cash on hand is compared to the results from the register.
Someone is responsible for preparing a deposit slip and taking the deposits to the bank.
Separation of duties requires someone else to enter the sale receipts into an accounting system.
If there are discrepancies an investigation might occur.
Cash receipts over the counter aren't the only ways companies receive cash.
Many do so through the mail. Customers mail in checks or cash for payments on accounts.
The key to good internal controls over cash receipts by mail is separation of duties.
The person receiving the cash isn't the same person who was recording
customer payments into an accounting system.
You see that the cash goes to a separate department or person than the remittance advice.
At the end of the period,
we perform a bank reconciliation to make sure all of the amounts deposited in the bank are the same as what was recorded in the cash ledger.
Some of you might not be familiar with the term remittance advice here is an example of one.
Often it is attached to the bill or invoice and you just separate it at its perforation
and include it with your payment check. It contains all of your account information
that the receiving company will need to post a payment toyour account properly.
Strong internal controls over payments is important to protect cash as well.
Companies need good separation of duties between
operations and writing checks for cash payments.
Payment by check is an important internal control for the following reasons:
The check provides a record of the payment.
The check must be signed by an authorized personnel.
And before signing the check, invoices and other evidence supporting documentation must be reviewed.
To ensure proper purchases and payments are made the following steps should be followed:
A buyer orders products and provides a purchase number to the seller.
This authorizes the seller to sell goods to the company.
A copy of the purchase order goes to the accounting department.
The purchase order should include the numbers of the items ordered and quoted prices.
The seller then ships goods
to the buyer and sends an invoice to the accounting department of the buying company.
Once the items are received by a buyer, a receiving report is prepared detailing the items received and quantities.
This report is also sent to the accounting department.
Once the accounting department has received a copy of the purchase order, the invoice, and the receiving report,
a comparison is made to make sure everything checks out.
If it does, this invoice can be processed and authorized for payment.
If not, the discrepancies need to be investigated.
And that concludes this short video explaining internal controls over cash, receipts and payments.
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