CHAPTER ONE – CASH CONTROL AND PETTY CASH

I CASH CONTROL

 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.

 The need to control cash is clearly evident and has many aspects.
Without the proper timing of cash flows and the protection of idle cash,
a business cannot survive.
 Companies protect their assets by:

 segregating employee duties,

 assigning specific duties to each employee,
 rotating employee job assignments, and
 Using mechanical devices. Like having cameras, scanners etc

Control over Cash Receipts

 Although businesses vary their specific procedures for controlling cash

receipts, they usually observe the following principles:

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  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.
 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 given earlier in the
chapter, as does the next principle.
 Arrange duties so that the employee who receives the cash does not
disburse the cash. This control measure is possible in all but the smallest
companies.
Control on Cash disbursements
 Companies also need controls over cash disbursements. Since a
company spends most of its cash by check, 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.
 Many retail stores make refunds for returned merchandise from the
cash register. When this practice is followed, clerks should have refund
tickets approved by a supervisor before refunding cash.
 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.

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  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 sign checks neither have
access to cancelled 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.

 “Everyone has heard a story about a seemingly great employee who has
worked in the business for many years, who would never do anything
wrong and who treats, the business like his or her own. And yet, that
person is discovered using the company’s check book to pay personal
expenses.”

Cash control procedures

These cash control procedures are based on and fall into 4 main areas, which
are listed below.

1. Segregation of duties prevents employees from concealing errors or

irregularities.
2. Asset accountability ensures that assets are accounted for, properly
documented and secured, and trackable to specific cash handlers.
3. Physical security focuses on the safety of people and the proper
maintenance and control of assets.
4. Reconciliation procedures ensure proper documentation and approval
of transactions.

Segregation of duties

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Ideally, the functions in the table below should be performed by different
individuals to maintain a system of checks and balances. Sometimes, however,
staffing levels require that one individual perform 2 or more of the functions.

Function Example of duties

Recordkeeping  Ring, process, post/ validate cash register
transactions.
 Record sale transactions manually.
 Prepare cash receipt back-ups.
 Post only charges/ payments to an accounts receivable
system.
 Collect and forward all records of sales activity, cash
register readings, and sales adjustment (i.e., voids,
refunds/ returns, inventory adjustments, daily and
monthly balancing records and sales audits) to the
department's accounting office for proper
reconciliation to the general ledger.
Authorization  Approve voids, refunds, and other correcting entries.
 Approve departmental deposits.
 Approve cash transfers.
 Approve movement of assets.
 Approve anything that is unusual.
Asset custody  Access any fund ("cash").
 Access stored cash or other assets.
 Maintain custody of petty cash or change fund.
 Maintain access or custody of returned checks.
Reconciliation Performed at a supervisory level or by department's
accounting office

 Compare funds collected to the accounts receivable

postings.
 Compare collections to deposits.
 Compare a surprise count of the asset inventory to
the appropriate records.

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  Compare departmental records of revenue (sales) to
the general ledger.
 Once reconciliation is complete, all records of
reconciliation process should be stored by the
department accounting office along with all records
pertaining to sales activity.

Asset Accountability

The functions in the table below enable cash handlers to maintain a proper
accountability structure.

Function Example of duties

Individual  Identify every transaction to an individual.
 Assign each cash handler a separate drawer.
 Assign each cash handler a separate password.
 Perform a background check for each cash handler.
Cash  Secure all funds properly.
 Document all movement ("transfers") with receipts.
 Secure all cash transactions in a safe place.
 Give a receipt to every customer.
 Do not share safe combinations and passwords.
 Secure keys properly.
Process  Know where an asset is at all times.
 Document all transfers with receipts.
 Prepare, maintain, and secure all receipts.

Physical Security

The physical security functions in the table below ensure the safety of people
and assets.

Function Example of duties

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 Monitoring  Use an armoured car or a police escort to transport cash.
 Open and close a cash handling station with two people
Present.
 Store assets properly.
 Alert the police with an alarm system as necessary.
 Secure keys properly.
 Change safe combinations annually or when there is turnove
 Avoid counting cash when visible to others.
Physical layout  Follow the risk management standards.
 Store assets and cash properly.
 Avoid counting cash when visible to others.
 Install and utilize the proper alarm system.
Personnel pre-  Perform background checks on all prospective cash-handlin
screening employees.
 Fingerprint all prospective cash-handling employees.
Inventory control  Report shortages and overages to the appropriate contacts.
 Secure keys properly.

Reconciliation

The functions in the table below ensure proper documentation and approval
of transactions.

Function Example of duties

Transaction  Collect receipts.
recording,
 Reconcile daily receipts to the cash register totals.
documentation
and follow-up
Authorization  Reconcile the receipts issued to maintain numerical
and approvals order.
 Reconcile and verify the register beginning and
ending balances.

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  Perform surprise cash counts on any time or during
staff changes.
Segregation of  Reconcile bank accounts to major cash handling
duties deposits.
 Perform receipt number reconciliation control.
 Reconcile and control register transaction/ dollar
values.
 Control and authorize error, void, and/ or refund
transactions.

Basic Cash Control: Principles & Practices

Pre-condition 1: Cash handlers are authorized

Three Major Control Tasks

Unit supervisors and managers must ensure that all cash handlers are properly
authorized to handle cash.

 Verify the employee's employment history (applicable to new hires)

 Request employee fingerprint/background check - (applicable to all
employees who handle cash unless the dollar amount involved qualifies for one
of the exceptions allowed by company policy)
 File proper documentation (applicable to all employees who handle cash)

Pre-condition 2: Maintain separation of duties

One of the most important steps your unit can take to protect cash -- and you the cash
handler -- is to separate cash handling duties among different people. This way, no one
person has control over the entire cash handling process. This principle is
called Separation of Duties or Segregation of Duties.

Principle - No one person should have complete control over a transaction.

Practice - In separation of duties at least two people are involved in any cash handling
transaction.

Control Tasks

Separate cash handling duties, whenever possible, to different people

Dual Custody

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Watch police officers on patrol, Loomis guards transporting cash, or a grocery clerk
depositing cash to a safe. When working on high risk tasks, they always work in pairs.
One person carries the cash and makes the deposit, the other monitors for safety and
keeps the other partner in view.

Involving two people in a critical cash handling task is a special application

of Separation Duties called Dual Custody. At a Company, whether you are depositing
cash to a drop box, counting cash, or engaging in any such critical task, having two
people engaged in that activity together is an important practice.

Practicing dual custody:

 Encourages cash handlers to check each other

 Reduces the opportunity for robbery and theft
 If loss does occur, protects cash handlers from unwarranted suspicion

Step 1 - Accept Cash and Endorse Checks

Principle: Document cash and checks properly

Thousands of dollars exchange hands daily on companies, usually in the form of cash,
checks and credit cards. Cash transactions are not things, but events that begin and
end. Unless they're documented, there is no way to track the movement of money. This
has big consequences.

Every time you receive cash, you must engage in three control tasks:

 Accept the payment. If payment is by check, ensure the check is payable to the
concerned party
 Record the transaction with a receipt to the customer.
 When not in use, place all cash in a designated secure location.

Step 2 - Prepare Deposit

So far, you have endorsed the check(s), given a receipt to the customer, and kept your
cash in a locked and secure location. The next step is to complete the proper deposit
slip.

Staff working in a main cashiering unit, will complete the bank's deposit slip for Bank of
TD/CIBC. Staff working in all other units will complete a Departmental / Sub Cashier
Cash Collections Deposit Form.

Control Task - Use the correct deposit form/slip and document accurately:

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  Units run adding machine tape(s) of all checks received and a separate tape for
all credit card sales. Attach the tapes to the corresponding checks and/or credit
card receipts.
 Accurately provide all appropriate information on the form. To provide individual
accountability, the preparer and reviewer sign or initial the deposit form.
 Include other supporting documentation.

Step 3 - Deposit Cash - Control Tasks

Minimize the Risk

Count cash in a location where no one outside of the office/unit can see you doing it. If
others don't know that you have cash, especially a lot of cash, they are less likely to be
barging in demanding the money.

At the end of the workday, secure all funds and leave the register's cash drawer open
so that it is obvious that the register contains no cash.

When to Deposit Cash, Checks and Credit Card receipts

To prevent too much cash from accumulating at your in-take point,

Sub-cashiering
the Company specifies when you are to deposit excess cash at the
stations
Main Cashier's office.
and
Cash Handling
Sub-cashiers and cash handlers (unit personnel) must deposit at least
depts/units
daily.

Step 4 - Reconcile Deposits - Control Tasks

Control Task - Investigate all Cash Differences

There will be times when your cash and receipt amounts will be different and won't
balance the first time. This is very common and most often due to clerical errors.

As a cash handler, you must investigate the differences to determine its source. You
must account even for small cash differences, because over time they add up to large
losses in the organization.

Find the Source of Cash Differences

To investigate cash differences, consider the following possible causes:

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  Was the cash in the till counted incorrectly?
o Recount your cash, preferably in dual custody
 Was your arithmetic or keying incorrect?
o Run a second tape to double check the accuracy of your 1st tape.
o Running two balance tapes daily is a good habit to get into.
 Was change counted incorrectly back to a customer?
o This is a loss and the reason needs to be documented and reported.
 Were numbers transposed on your receipt/deposit slip?
o If so, double check your figures and slow down next time.
 Is cash missing?
o If so, this is a loss and must be reported.

Step 5 - Report Losses

Though most cash differences can be traced to clerical errors, be especially alert to
mysterious losses or patterns of loss.

 You must report any losses to your supervisor.

 If you feel uncomfortable reporting a suspicious loss to your supervisor, report it
directly to the Director of Internal Audit.

II - IMPREST SYSTEM OF PETTY CASH

The imprest system is an accounting system for paying out and subsequently
replenishing petty cash. Petty cash is a small reserve of cash kept on-site at a
business location for incidental cash needs. The imprest system is designed to
provide a rudimentary manual method for tracking petty cash balances and
how cash is being used. The essential features of an imprest system are:

 A fixed amount of cash is allocated to a petty cash fund, which is

stated in a separate account in the general ledger.
 All cash distributions from the petty cash fund are documented with
receipts.
 Petty cash disbursement receipts are used as the basis for periodic
replenishments of the petty cash fund.
 Variances between expected and actual fund balances are regularly
reviewed and investigated.

In essence, expenses are recognized when new cash replenishments are

made to the petty cash fund from the company checking account. When
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cash is paid from the checking account, the entry is a debit to the various
expenses for which receipts are being supplied by the petty cash custodian,
and a credit to the cash account.

Establish Petty Cash Fund

Petty Cash 1000

Bank/Cash 1000

Replenishment of Petty Cash

Various expenses 930

Bank/Cash 930

Unless the amount of cash assigned to the petty cash fund is deliberately
altered, there is no reason why there should ever be another entry into the
account used to document the petty cash balance, since all petty cash
replenishments are coming from the company checking account.

The main feature of this system is the need to document all expenditures.
Doing so is an excellent way to maintain a high level of control over cash
disbursements.

The imprest system is declining in popularity, since many businesses prefer

to use company credit cards for incidental purchases, or have employees
pay cash and then apply for reimbursement through the corporate expense
reimbursement system. Also, the imprest system can cause cash leakage
from a business, either through theft of the cash or because the petty cash
custodian does not do a proper job of recording disbursements.

Definition of Petty Cash

Petty Cash refers to a small amount of currency and coins that a company
uses to pay small amounts without writing a check. The amount of petty cash
(also known as the petty cash fund) varies by company or organization. For
now, let's assume that the amount is $100.

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One person is designated as the petty cash custodian. This person is
responsible for disbursing the small amounts and for documenting each
payment with a petty cash receipt.

Petty cash or a petty cash fund is a small amount of money available for
paying small expenses without writing a check. Petty Cash is also the title of
the general ledger current asset account that reports the amount of the
company's petty cash. The amount of petty cash will vary by company and
may be in the range of $300 to $3000.

The petty cash is controlled through the use of a petty cash voucher for each
payment made. The expenses will be recorded in the company's general ledger
expense accounts when the petty cash on hand is replenished.

Practical Applications of Imprest System of Petty Cash

An imprest system of petty cash means that the general ledger account Petty
Cash will remain dormant at a constant amount. If the amount of petty cash is
$100, then the Petty Cash account will always report a debit balance of $100.
This $100 is the imprest balance. As long as the $100 is adequate for the
organization's small disbursements, then the general ledger account Petty
Cash will never be debited or credited again.

When the currency and coins on hand gets low, the petty cash custodian will
request a check to replenish the coins and currency that were disbursed. Since
the requested check is drawn on the organization's checking account, the
Cash account (not the Petty Cash account) will be credited the debits will go
to the expense accounts indicated by the petty cash receipts, such as postage
expense, supplies expense, etc. In other words, the general ledger account
Petty Cash is not involved in the replenishment. (Replenishment means
getting the total of the currency and coins back to the imprest amount.) The
petty cash custodian will cash the check and add the amount to the other cash.
Under the imprest system, the petty cash custodian should at all times have a
combination of currency, coins, and petty cash receipts that equals $100 (the
imprest petty cash balance).

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Control over the petty cash occurs during the replenishment process. The
person approving the check for the petty cash custodian to cash should review
the petty cash receipts and attach them to the check request. Control can also
occur when an independent person confirms that the petty cash custodian's
cash and receipts add up to the imprest amount.

How do I start a petty cash fund?

To start a petty cash fund you need to open a general ledger account entitled
Petty Cash. This will be an additional cash account that you could report
either separately or have its balance included with other cash accounts when
preparing a balance sheet.

Next you need to write a check for the amount that you believe is the amount
needed for making small payments in your office. Let's assume that the
amount will be $100. When processing the check you would indicate the
account code for Petty Cash, so that the new account will be debited for $100.

You also need to designate one person to be the petty cash custodian. This
person's name will be the payee of the $100 check. This person will then be
accountable for the $100. At all times the custodian must have a combination
of cash and petty cash receipts which adds up to $100.00

Just prior to issuing financial statements, the petty cash custodian should
request cash for the petty cash receipts. This is known as replenishing the
petty cash fund. This allows for the expenses to be included in the income
statement and will result in the custodian having the $100 of cash that will be
reported in the balance sheet. The custodian can also replenish the petty cash
fund when there is little cash on hand due to a large amount of petty cash
payments.

Examples of Petty Cash Payments

Some examples of small payments made from petty cash include:

 Paying the mail carrier 30 cents for the postage due on a letter
 Reimbursing an employee $9 for supplies purchased

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  Reimbursing an employee for purchasing $14 of bakery goods for an
early morning meeting

Petty cash imprest system allows only the replenishment of the amount of
money spends. So, if one starts the month with $100 in one's petty cash float
and spend $90 of that cash in that month, an amount of $90 will be then
placed in one's petty cash float to bring the balance of the petty cash float
back to $100. The replenishment is credited to the primary cash account,
usually a bank account (Dr - Petty Cash a/c, Cr - Bank a/c) and the debits will
go to the respective expenses account, based on the petty cash receipt dockets
(Dr - Expense a/c, Cr - Petty Cash a/c).

Establish petty cash

Debit Credit
Petty cash fund 100.00
Bank/Cash 100.00

1st method - Replenishment

Expenses 90.00
Bank/Cash 90.00

2nd method - Replenishment

Expenses 90.00
Petty cash 90.00
Petty cash 90.00
Bank 90.00

Advantages

In this example the maximum amount of petty cash that can be issued (spent)
is $100. The claimant may only spend what they have and is only replenished
with what they spend, in this case $90.

In a non-imprest system where a fixed amount is issued every month, e.g.,

$100 every time cash is required, there is no incentive to ensure all money
issued has been documented because when money is all spent a check for a

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fixed amount is issued. It is much more difficult to reconcile a non imprest
system as one never knows how much exactly should be in the float.

In an imprest system the amount requested is documented, the documentation

being the petty cash vouchers/dockets and their associated receipts or
invoices. Therefore, at all times one can check how much should be left in the
petty cash float by deducting the amount spent from the opening petty cash
float.

How petty cash imprest system works

The imprest system ensures that one must document how the petty cash is
spent. In a petty cash system, petty cash receipts are written for each amount
issued. So, when all of these receipts are totalled at the end of the month and
deducted from the opening petty cash float, the calculated value must agree
with what is left in the petty cash float. Under the imprest system, only that
which is recorded as spent is replenished. Any shortfalls might need to be
replenished by the guardian, usually a bookkeeper, of the petty cash float
from their own personal resources.

Exercise 1 – Internal control over cash receipts

Sun Shine spare parts store collects part of its cash receipts through mail. Sun
shine’s bookkeeper opens the mail and deposits the cash received each day.

What internal control problem do you see in this arrangement? What changes
do you recommend?

Separation of duties, two persons rule, dual custody

Bookkeeper should maintain the records and the cashier would go and deposit
the money.

Exercise 2 – Petty cash fund

Hersey Company, a payroll solutions firm established a $200.00 petty cash

fund on Jan 1, 2019. By the end of Jan 31, 2019 there are expenditures of
gasoline $30, stationeries $22.00, postage $12.50, and maintenance expense of
$55.00. Prepare journal entries:

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 a) The establishment of the petty cash fund as of Jan 1, 2019
b) The Replenishment of the petty cash using both methods by Jan
31, 2019

a) Establishing
Debit Credit
Petty cash 200.00
Bank/Cash 200.00

b) 1st method -Replenishing

Gasoline expense 30.00
Stationeries expense 22.00
Postage expense 12.50
Maintenance expense 55.00
Bank/ Cash 119.50

2nd method- Replenishing

All expenses 119.50
Petty Cash 119.50
Petty cash 119.50
Bank/Cash 119.50

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