CASH RECEIPTS PROCEDURES

The sales order procedure described a credit transaction that resulted in the establishment of an account receivable. Payment on
the account is due at some future date, which the terms of trade determine. Cash receipts procedures apply to this future event.
They involve receiving and securing the cash; depositing the cash in the bank; matching the payment with the customer and
adjusting the correct account; and properly accounting for and reconciling the financial details of the transaction. The DFD in Figure
4-9 shows the relationship between these tasks. They are described in detail in the following section.

1. OPEN MAIL AND PREPARE

REMITTANCE ADVICE. A mail room
employee opens envelopes containing
customers’ payments and remittance
advices. Remittance advices contain
information needed to service
individual customers’ accounts. This
includes payment date, account
number, amount paid, and customer
check number. Only the portion above
the perforated line is the remittance
advice, which the customer removes
and returns with the payment. In
some systems, the lower portion of
the document is a customer
statement that the billing department
sends out periodically. In other cases,
this could be the original customer invoice, which was described in the sales order procedures.

The remittance advice is a form of a turnaround document, as

described in Chapter 2. Turnaround documents are product
documents of one system that become source documents for another
system. This is illustrated in Figure 2-4. The customer receives a
perforated two-part bill or statement. The top portion is the actual
bill, and the bottom portion is the remittance advice. Customers
remove the remittance advice and return it to the company along
with their payment (typically a check). A turnaround document
contains important information about a customer’s account to help
the cash receipts system process the payment. One of the problems
designers of cash receipts systems face is matching customer
payments to the correct customer accounts. Providing this needed
information as a product of the sales system ensures accuracy when
the cash receipts system processes it. Its importance is most
apparent in firms that process large volumes of cash receipts daily.
For example, processing a check from John Smith with no supporting
details would require a time-consuming and costly search through
perhaps thousands of records to find the correct John Smith. This
task is greatly simplified when the customer provides necessary
account number and posting information. Because of the possibility
of transcription errors and omissions, however, sellers do not rely on
their customers to provide this information directly on their checks.
Errors are avoided and operational efficiency is greatly improved
when using remittance advices.

Mail room personnel route the checks and remittance advices to an administrative clerk who endorses the checks ‘‘For
Deposit Only’’ and reconciles the amount on each remittance advice with the corresponding check. The clerk then records
each check on a form called a remittance list (or cash prelist), where all cash received is logged. In this example, the clerk
prepares three copies of the remittance list. The original copy is sent with the checks to the record and deposit checks
function. The second copy goes with the remittance advices to the
update AR function. The third goes to a reconciliation task.

2. RECORD AND DEPOSIT CHECKS. A cash receipts employee verifies the

accuracy and completeness of the checks against the prelist. Any
checks possibly lost or misdirected between the mail room and this
function are thus identified. After reconciling the prelist to the checks,
the employee records the check in the cash receipts journal. All cash
receipts transactions, including cash sales, miscellaneous cash receipts,
and cash received on account, are recorded in the cash receipts
CASH RECEIPTS PROCEDURES AND CASH DISBURSEMENT SYSTEMS Page 1
 journal. Figure 4-11 illustrates this with an example of each type of transaction. Notice that each check received from a
customer is listed as a separate line item.

Next, the clerk prepares a bank deposit slip showing the amount of the day’s receipts and forwards this along with the
checks to the bank. Upon deposit of the funds, the bank teller validates the deposit slip and returns it to the company for
reconciliation. At the end of the day, the cash receipts employee summarizes the journal entries and sends the following
journal voucher entry to the general ledger function.
DR. CR.
Cash xxxxx
AR-control xxxxx

3. UPDATE ACCOUNTS RECEIVABLE. The remittance advices are used to post to the customers’ accounts in the AR subsidiary
ledger. Periodically, the changes in account balances are summarized and forwarded to the general ledger function.

4. UPDATE GENERAL LEDGER. Upon receipt of the journal voucher and the account summary, the general ledger function
reconciles the figures, posts to the cash and AR control accounts, and files the journal voucher.

5. RECONCILE CASH RECEIPTS AND DEPOSITS. Periodically (weekly or monthly), a clerk from the controller’s office (or an
employee not involved with the cash receipts procedures) reconciles cash receipts by comparing the following documents:
(1) a copy of the prelist, (2) deposit slips received from the bank, and (3) related journal vouchers.

CONTROLS

Transaction Authorization
The objective of transaction authorization is to ensure that only valid transactions are processed. The cash prelist provides a means
for verifying that customer checks and remittance advices match in amount. The presence of an extra remittance advice in the AR
department or the absence of a customer’s check in the cash receipts department would be detected when the batch is reconciled
with the prelist. Thus, the prelist authorizes the posting of a remittance advice to a customer’s account.

Segregation of Duties
Segregating duties ensures that no single individual or department processes a transaction in its entirety. The organization should be
structured so that the perpetration of a fraud requires collusion between two or more individuals. The record-keeping tasks need to
be carefully separated. Specifically, the subsidiary ledgers (AR and inventory), the journals (sales and cash receipts), and the general
ledger should be separately maintained. An individual with total record-keeping responsibility, in collusion with someone with asset
custody, is in a position to perpetrate fraud. By separating these tasks, collusion must involve more people, which increases the risk
of detection and therefore is less likely to occur.

Supervision
Supervision can also provide control in systems that are properly segregated. For example, the mail room is a point of risk in most
cash receipts systems. The individual who opens the mail has access both to cash (the asset) and to the remittance advice (the
record of the transaction). A dishonest employee may use this opportunity to steal the check, cash it, and destroy the remittance
advice, thus leaving no evidence of the transaction. Ultimately, this sort of fraud will come to light when the customer complains
after being billed again for the same item and produces the canceled check to prove that payment was made. By the time the firm
gets to the bottom of this problem, however, the perpetrator may have committed the crime many times and left the organization.
Detecting crimes after the fact accomplishes little; prevention is the best solution. The deterrent effect of supervision can provide an
effective preventive control.

Accounting Records

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This control is also an operational feature of well-designed accounting systems. Sometimes transactions get lost in the system. By
following the audit trail, management can discover where an error occurred. Several specific control techniques contribute to the
audit trail.

Access Controls

Access controls prevent and detect unauthorized and illegal access to the firm’s assets. The physical assets at risk in the revenue
cycle are inventories and cash. Limiting access to these items includes:
 Warehouse security, such as fences, alarms, and guards.
 Depositing cash daily in the bank.
 Using a safe or night deposit box for cash.
 Locking cash drawers and safes in the cash receipts department

Independent Verification
Prior to posting to control accounts, the general ledger function reconciles journal vouchers and summary reports prepared
independently in different function areas. The billing function summarizes the sales journal, inventory control summarizes changes
in the inventory subsidiary ledger, the cash receipts function summarizes the cash receipts journal, and accounts receivable
summarizes the AR subsidiary ledger.

SYSTEM FLOWCHART
Figure 4-14 presents a system flowchart depicting the cash receipts procedures.

Mail Room

Customer payments and remittance advices arrive at the mail room, where the envelopes are opened. The checks are sent to the
cashier in the cash receipts department, and the remittance advices are sent to the AR department.

Cash Receipts
The cashier records the checks in the cash receipts journal and promptly sends them to the bank, accompanied by two copies of the
deposit slip. Periodically, the employee prepares a journal voucher and sends it to the general ledger department.

Accounts Receivable
The AR department uses the remittance advices to reduce the customers’ account balances consistent with the amount paid. The AR
clerk prepares a summary of changes in account balances, which is sent to the general ledger department.

General Ledger Department

Upon receipt of the journal voucher and account summary from cash receipts and AR, respectively, the general ledger clerk
reconciles the information and posts to the control accounts.

Controller’s Office
Because cash is a liquid asset and subject to misappropriation, additional controls are necessary. In this case, someone from the
controller’s office periodically performs a bank reconciliation by comparing deposit slips returned from the bank, account summaries
used to post to the accounts, and journal vouchers.

CASH DISBURSEMENT SYSTEM

The cash disbursements system processes the payment of obligations created in the purchases system. The principal objective of this
system is to ensure that only valid creditors receive payment and that amounts paid are timely and correct. If the system makes
payments early, the firm forgoes interest income that it could have earned on the funds. If obligations are paid late, however, the
firm will lose purchase discounts or may damage its credit standing. Figure 5-10 presents a DFD conceptually depicting the
information flows and key tasks of the cash disbursements system.

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 1. IDENTIFY LIABILITIES DUE. The cash disbursements process begins in the AP department by identifying items that have
come due. Each day, the AP function reviews the open AP file (or vouchers payable file) for such items and sends payment
approval in the form of a voucher packet (the voucher and/or supporting documents) to the cash disbursements
department.

2. PREPARE CASH DISBURSEMENT. The cash disbursements clerk receives the voucher packet and reviews the documents for
completeness and clerical accuracy. For each disbursement, the clerk prepares a check and records the check number,
dollar amount, voucher number, and other pertinent data in the check register, which is also called the cash disbursements
journal. Figure 5-11 shows an example of a check register. Depending on the organization’s materiality threshold, the check
may require additional approval by the cash disbursements department manager or treasurer (not shown in Figure 5-10).
The negotiable portion of the check is mailed to the supplier, and a copy of it is attached to the voucher packet as proof of
payment. The clerk marks the documents in the voucher packets paid and returns them to the AP clerk. Finally, the cash
disbursements clerk summarizes the entries made to the check register and sends a journal voucher with the following
journal entry to the general ledger department:
DR. CR.
Accounts Payable xxxxx
Cash xxxxx

3. UPDATE AP RECORD. Upon receipt of the voucher packet, the AP clerk removes the liability by debiting the AP subsidiary
account or by recording the check number and payment date in the voucher register. The voucher packet is filed in the
closed voucher file, and an account summary is prepared and sent to the general ledger function.

4. POST TO GENERAL LEDGER. The general ledger function receives the journal voucher from cash disbursements and the
account summary from AP. The voucher shows the total reductions in the firm’s obligations and cash account as a result of
payments to suppliers. These numbers are reconciled with the AP summary, and the AP control and cash accounts in the
general ledger are updated accordingly. The approved journal voucher is then filed. This concludes the cash disbursements
procedures.

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CONTROLS

CASH DISBURSEMENTS SYSTEMS

A detailed system flowchart of a manual cash disbursements system is presented in Figure 5-13. The tasks performed in
each of the key processes are discussed in the following section.

AP Department
Each day, the AP clerk reviews the open vouchers payable (AP) file for items due and sends the vouchers and supporting
documents to the cash disbursements department.

Cash Disbursements Department

The cash disbursements clerk receives the voucher packets and reviews the documents for completeness and clerical
accuracy. For each disbursement, the clerk prepares a three-part check and records the check number, dollar amount,
voucher number, and other pertinent data in the check register. The check, along with the supporting documents, goes
to the cash disbursements department manager, or treasurer, for his or her signature. The negotiable portion of the
check is mailed to the supplier. The clerk returns the voucher packet and check copy to the AP department and files one
copy of the check. Finally, the clerk summarizes the entries made to the check register and sends a journal voucher to
the general ledger department.

AP Department
Upon receipt of the voucher packet, the AP clerk removes the liability by recording the check number in the voucher
register and filing the voucher packet in the closed voucher file. Finally, the clerk sends an AP summary to the general
ledger department.

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