Accounting for Controlling Cash

Over Cash in General: Because of its nature, cash is the most likely to be
diverted and used improperly by employees. Many transactions either directly
or indirectly affect the receipt or payment of cash. Therefore, it is necessary
that cash be effectively safeguarded by special controls.
Effective Systems of Internal Control: Internal control is the organization plan
and all the related measures that an entity adopt to
 Safeguard assets
 Encourage adherence to company policies
 Promote operational efficiency (obtain the best out come at the lowest cost ) and
 Ensure accurate and reliable accounting g records.
Effective systems of internal control includes
 Competent, reliable and ethical personnel.
 Assignment of responsibilities -Internal & External audit
 Document & its records
 Proper authorization
 Separation of duties
- Separation of operation – from accounting
- Separation of custody of assets from accounting
- Separation of authorization of transactions from the custody of related assets
- Separation of duties within the accounting function
The Limitation of Internal control
- Two or more employees working as a team –colluding – to defraud
the firm can beat systems designed to thwart an individual’s
employee’s fraud.
- Most internal control measure can be circumvented or overcome
therefore; a system of internal control that is too complex can be
strangling the business with red tape.

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The bank Account as a tool for Controlling Cash
Cash is the most liquid asset because it is the medium of exchange. Cash is easy
to conceal, easy to more, & relatively easy stealing. One of the major devices for
maintaining control over cash is the use of the bank account. To get the most
benefit from bank account
- All cash received must be deposited in the bank
- All cash payment must be made by check.
When such a system is strictly followed, there is a double record of cash, one
maintained by the business (depositor), and the other by the bank. The forms
used by the bank in connection with bank account are
a) Signature card.
b) Deposit ticket.
c) Check
d) Records of checks drawn.
e) Bank Statement
f) Electronic fund transfer
Definition of Check: - A check is a written instrument signed by the depositor,
ordering the bank to pay a certain sum of money to the order of a designated
person. There are three parties to a check
a. The drawer: is the one who signs the check
b. The payee: is the one to whose order the check is drawn.
c. The drawee : is the bank on which the check is drawn
Bank statement: A bank statement is the document that the bank uses to report
what it did with depositor’s cash. The statement shows the bank account’s
beginning balance, checks and other debits (deduction by bank), deposits and
other credits (additions by the bank), and the balance at the end of the period.

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The depositor’s checks received by the bank during the period may accompany
the bank statement, arranged in order of payment. Those checks the bank has
paid on behalf of the depositor are called canceled checks.
Electronic fund Transfer (EFT) is a system that relies on electronic
communication not paper documents- to transfer cash. Most businesses today
rely on EFT for repetitive cash transactions. It is much cheaper for a company to
pay employees by EFT (direct deposit) than by issuing hundreds of payroll
checks.
The Bank Reconciliation
Where all cash receipts are deposited in the bank and payments are made by
checks, the cash account often called cash in bank. This account in the
depositor’s ledger is the reciprocal of the account with the depositor in the banks
ledger. Cash in bank in the depositor’s ledger is an asset account with a debit
balance &, the account with the depositor in the bank’s ledger is a liability with a
credit balance. The books and the bank statement may show different amounts,
but both may be correct. The difference arises because of one or more of the
following problems.
A. Delay by either party in recording transactions by
i. Deposit in transit: is an outstanding deposit recorded by the
company (depositor) and not yet by its bank.
ii. Outstanding checks: are checks that the company has issued and
recorded them on its books but the bank has not yet paid them
iii. Bank collection: banks sometimes collect money on behalf of
depositors. Many businesses have their customer pay directly to
the company bank account. It is known as a lock –box system,
which reduces the possibility of theft and places the business
cash in circulation faster than of the cash had to be collected and
deposited by the company personnel.

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 iv. Electronic fund transfer: The bank may receive or pay cash on
behalf of the depositor.
v. Bank service charge: This is the bank’s fee charged against the
depositor’s account for processing the depositor’s account. Bank
commonly bases the service charge on the account balance and
the depositor learns the amount of the service charge from the
bank account. It also includes the cost of printing checks.
vi. Interest Revenue on Checking Account: Banks often pay interest
to depositors who keep enough cash in their account. The bank
notifies depositors of their interest on the bank statement.
vii. Non-sufficient funds (NSF) Checks received from customers:
They are sometimes known as hot checks. The maker writes a
check & gives it to the payee, who deposited the check in a bank.
The payee’s bank adds the receipt amount to the payee’s bank
balance on the assumption that the check is good. If the maker’s
bank balance is insufficient to pay the check, the maker’s bank
refuses to pay and sends an NSF notice to the payee’s bank. The
payee’s bank subtracts the receipt amount from the payee’s bank
balance & notifies the payee of this NSF action.
viii. Checks collected, deposited & returned to payee by the bank for
reasons other than NSF. Banks return check to the pay if
 The maker’s account has closed
 The date is “stale” (some checks state “void after 30 days”)
 The signature is not authorized
 The check has been altered
 The check form is improper (for example, a counter fit)

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B. Errors by either by the company or bank
- All errors should be corrected and the correction will be part of the
bank reconciliation.
The process of bringing in to agreement the balance maintained by the bank &
the depositor is called bank reconciliation.
- The reconciliation starts with two figures, the balance shown on the
bank statement (balance per bank) and the balance in the company’s
cash account (balance per book).
The following is the format of bank reconciliation
ABC Company
Bank Reconciliation
Dec 31, 2006
Bank Balance according to Bank statement --- xxx
Add: - Additions by depositor’s not on bank
Statement (outstanding deposit) -------------- xxx
- Errors made by banks -------------------xxx ------------------------ xxx
xxx
Deduct – Deductions by depositor not on bank statement xxx
- Bank errors -------------------------------------------------- xx---- xxx
- Adjusted Balance ---------------------------------------------------- xxx
Balance according to depositor’s records (balance per book) ------------------- xxx
Add: - Bank collection of Note ------------------------xxx
- EFT receipt of Note ---------------------xxx
- Interest revenue earned ----------------- xxx
- Depositor’s errors ----------------------- xxx ----------------------- xxx
xxx
Deduct : - Deductions by bank not recorded by the depositor
- NSF checks -------------------------------xxx
- Bank service charge –-------------------- xx
- Depositor’s Error ------------------------ xx ---------------------------xxx
Adjusted balance -------------------------------------------------------------------- xxx

Journal Entries: Items that appeared on the depositor side in the bank
reconciliation requires journal entries.

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Eg. The cash in bank account of ABC company at February 29, 2012 indicated a
balance of $20, 650 .30 after both the cash receipts journal and the check
register for January had been posted. The bank statement in dictated a
balance $31,606.30 on the same date. Comparisons of the bank statement &
the accompanying cancelled checks and memorandums with the records
revealed the following reconciling items.
A. Checks outstanding total $ 14,941.50
B. A deposit of $ 6,467.75 representing receipt of January 31 had been
made to late to appear on the bank statement.
C. The bank had collected $ 3,090 on a note left for collection. A check
for $91 Returned with the statement had been recorded erroneously
in the check register as $ 19. The check was for the payment of an
obligation to xyz company for the purchase of office equipment on
account
D. A check drawn for $ 55 had been erroneously charged by the bank
as $550
E. Bank service charge for January amounted to $ 40.75
Instruction:
1. Prepare a bank reconciliation
2. Record the necessary entries in general journal form. The
accounts have not been closed.
Controlling over cash receipts
Department stores & other retail business receive cash from two main sources
a. Over the counter from customers
b. By mail from charge customer making payments on account.

Cash short & over: A difference often exists between actual cash receipts
and the day’s record of cash received whenever there is difference b/n the
record and the actual cash and no error can be found in the record, it must be

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 assumed that the mistake occurred in making changes. The cash short or
overage is recorded in an account entitled cash short and over.
Eg. Assume that the cash register tape (accounting record) of Xyz Company
indicated sales revenue of $25,000 from sales of sep1, 2011.
Cash change funds: is a fund of currency & coins maintained to make change.
The fund may be maintained by drawing up a check for the required amount.
Entry: cash on hand xxx
Cash in Bank xxx
- No additional charges or credits to the cash on hand are necessary
unless the amount of the fund is increased or decreased.
- It should remain in the cash register at the opening of every business
day
Eg, On Jan 15, 2011 cash sales for the day according to the cash register tapes
were Br. 942.40. The actual cash count on that date was $ 1,145.10. Besides a
change fund of Br 200 was established and included in the actual cash.
Required: A. Record the established of cash change fund
B.Determine the existence of cash short & over
C.Record the entry of sales in general journal form
Internal control of cash payments:
Strong control over
- cash payments by check
- purchasing
- Approval of payments is necessary.
- The use of two signatures.
- The use of the voucher system and Petty cash disbursements.

The voucher system: A voucher system is made of records, methods and

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 a. Voucher: is any document that servers as a proof of authority to pay cash,
such as invoices approved for payments, or evidence that cash has been
paid such as canceled checks.
b. Voucher register: after approval by a designated official, each voucher is
recorded in a journal known as voucher register. The vouchers are entered
in numerical order, each being recorded as a credit to Account payable or
voucher payable and as a debit to the account or accounts to be charged for
the expenditure.
c. Unpaid voucher file: after a voucher has been recorded in the voucher
register, it is paid in unpaid voucher file, where it remains until it is paid.
d. Check register: when a voucher is to be paid, it is removed from the un
paid voucher file and a check is issued in payment, The date, the number,
and the amount of the check are listed on the back of the voucher for use in
recording the payment in the check register. Paid vouchers and supporting
documents are after run thorough a canceling machine to prevent
accidental or intentional re- use.
e. Paid voucher file: after payment, vouchers are usually filed in numerical
order in a paid voucher file. They are them readily available for
examination by employees or independents auditors needing information
about certain expenditure.
Petty cash disbursements: It would be uneconomical for a business to write a
separate check for small amount of payments such as executive’s taxi fare,
postage due, transportation charge, purchase of urgently needed supplies at the
nearly shop etc, companies maintain small amount of cash on hand to pay for

such minor expenditures. This fund is called petty cash fund. The business needs
the following conditions to establish and replace the petty cash.
1. Estimate the amount of cash needed for small payments during a
period (month year)

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 2. Identify the employee who will administer the petty cash fund (petty
casher.)
3. Prepare a check for the amount of the petty cash fund & give it to
the petty cashier. Record the transactions in the cash payment
journal.
4. The petty cashier withdraws the cash from the bank & then administers the
fund.
5. When disbursements are to be made from the fund, a petty cash
receipt is prepared. The petty cashier gets the signature of the payee
on the receipt as evidence of making payment & then the payment is
made to the payee.
6. When the petty cash fund gets low to a predetermined level, the fund
is replenished to restore its balance to the original level.
Assume that the voucher system is used and that a petty cash fund of $500 is
established on august 1, of the current year. The fund is to be replenished when
its balance reaches to $100

Aug2 – 20 summaries of the petty cash receipts indicate that the following
payments were made from the petty cash.
 Supplies -------------------------- Br. 150
 Miscellaneous Adm. exp.---------- Br. 90
 Delivery expense -------------------Br 160

Aug 31 – The petty cash balance is Br. 250 summary of the petty cash receipts
since the last replenishment indicates the following expenditures.
- Miscellaneous selling exp ----------150
- Miscellaneous Adm. exp -----------100
Journal entres
Aug1 . Establishment: Petty cash -----------------------500

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 Voucher payable --------------- 500
Voucher payable -----------------500
Cash in bank ------------- -----500
Aug20. Replenishment
Supplies --------------- -- 150
Miscellaneous Administration Expense 90
Delivery expense 160
Voucher payable 400
* When the voucher is approved
Voucher payable 400
Cash in Bank 400
Aug30:
Miscellaneous selling Expense 150
Miscellaneous Administration Expense 100
Voucher payable 250
** When the voucher is approved
Voucher payable 250
Cash in bank 250

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