CASH CONTROLS

 Cash is the one asset that is readily convertible into any other type of asset. It also is easily
concealed and transported and is highly desired. Because of these characteristics, cash is the
asset most susceptible to fraudulent activities. In addition, because of the large volume of cash
transactions, numerous errors may occur in executing and recording them.
 To safeguard cash and to ensure the accuracy of the accounting records for cash, effective
internal control over cash is critical.

CASH RECEIPTS CONTROLS

 Establishment of Responsibility: Only designated personnel are authorized to handle cash

receipts (Cashiers)
 Segregation of Duties: Different individuals receive cash, record cash receipts, and hold the cash.
 Documentation Procedures: Use remittance advice(mail receipts), cash register tapes or
computer records, and deposited slips.
 Physical Controls: Store cash in safes and bank vaults; limit access to storage areas; use cash
registers or point-of-sale terminals.
 Independent Internal Verification : Supervisors count cash receipts daily; assistant treasurer
compares total receipts to bank deposits daily.
 Human Resource Controls: Bond personnel who handle cash; require employees to take
vacations; conduct background checks.

OVER-THE-COUNTER-RECEIPTS

In retail businesses, control of over-the-counter receipts centers on cash registers that are visible to
customers. A cash sale is entered in a cash register (or point-of-sale terminal), with the amount clearly
visible to the customer. This activity prevents the sales clerk from entering a lower amount and
pocketing the difference. The customer receives an itemized cash register receipt and is expected to
count the change received. The cash register's tape is locked in the register until a supervisor removes it.
This tape accumulates the daily transactions and totals.

At the end of the clerk's shift, the clerk counts the cash and sends the cash and the count to the cashier.
The cashier counts the cash, prepares a deposit slip, and deposits the cash at the bank. The cashier also
sends a duplicate of the deposit slip to the accounting department to indicate cash received. The
supervisor removes the cash register tape and sends it to the accounting department as the basis for a
journal entry to record the cash received. (For point-of-sale systems, the accounting department
receives information on daily transactions and totals through the computer network.)
Control of over-the-counter receipts

This system for handling cash receipts uses an important internal control principle—segregation of
recordkeeping from physical custody. The supervisor has access to the cash register tape but not to the
cash. The clerk and the cashier have access to the cash but not to the register tape. In addition, the cash
register tape provides documentation and enables independent internal verification. Use of these three
principles of internal control (segregation of recordkeeping from physical custody, documentation, and
independent internal verification) provides an effective system of internal control. Any attempt at
fraudulent activity should be detected unless there is collusion among the employees.

In some instances, the amount deposited at the bank will not agree with the cash recorded in the
accounting records based on the cash register tape. These differences often result because the clerk
hands incorrect change back to the retail customer. In this case, the difference between the actual cash
and the amount reported on the cash register tape is reported in a Cash Over and Short account. For
example, suppose that the cash register tape indicated sales of ₺6,956 but the amount of cash was only
₺6,946. A cash shortfall of ₺10 exists. To account for this cash shortfall and related cash, the company
makes the following entry.
Cash 6,946
Cash Over and Short 10
Sales Revenue 6,956
(To record cash shortfall)

Cash Over and Short is an income statement item. It is reported as miscellaneous expense when there is
a cash shortfall, and as miscellaneous revenue when there is an overage. Clearly, the amount should be
small. Any material amounts in this account should be investigated.

CASH DISBURSEMENTS CONTROLS

Companies disburse cash for a variety of reasons, such as to pay expenses and liabilities or to purchase
assets. Generally, internal control over cash disbursements is more effective when companies pay by
check or electronic funds transfer (EFT) rather than by cash. One exception is payments for incidental
amounts that are paid out of petty cash.

 Establishment of Responsibility: Only designated personnel are authorized to sign checks

(treasurer) and approve vendors.
 Segregation of Duties : Different individuals approve and make payments; check signers do not
record do not record disbursements.
 Documentation Procedures: Use prenumbered checks and account for them in sequence; each
check must have an approved invoice; require employees to use company credit cards for
reimbursable expenses; stamp invoices “paid”
 Physical Controls: Store blank checks in safes, with limited access; print check amounts by
machine in indelible ink.
 Independent Internal Verification: Compare checks to invoices; reconcile bank statement
monthly.
 Human Resource Controls: Bond personnel who handle cash; require employees to take
vacations; conduct background checks.

VOUCHER SYSTEM CONTROLS

Most medium and large companies use vouchers as part of their internal control over cash
disbursements. A voucher system is a network of approvals by authorized individuals, acting
independently, to ensure that all disbursements by check are proper.

The system begins with the authorization to incur a cost or expense. It ends with the issuance of a check
for the liability incurred. A voucher is an authorization form prepared for each expenditure. Companies
require vouchers for all types of cash disbursements except those from petty cash.

The starting point in preparing a voucher is to fill in the appropriate information about the liability on
the face of the voucher. The vendor's invoice provides most of the needed information. Then, an
employee in accounts payable records the voucher (in a journal called a voucher register) and files it
according to the date on which it is to be paid. The company issues and sends a check on that date, and
stamps the voucher “paid.” The paid voucher is sent to the accounting department for recording (in a
journal called the check register). A voucher system involves two journal entries, one to record the
liability when the voucher is issued and a second to pay the liability that relates to the voucher. The use
of a voucher system, whether done manually or electronically, improves internal control over cash
disbursements. First, the authorization process inherent in a voucher system establishes responsibility.
Each individual has responsibility to review the underlying documentation to ensure that it is correct. In
addition, the voucher system keeps track of the documents that back up each transaction. By keeping
these documents in one place, a supervisor can independently verify the authenticity of each
transaction. Consider, for example, the case of Aesop University presented in the “Anatomy of a Fraud”
box earlier in the chapter. Aesop did not use a voucher system for transactions under $2,500. As a
consequence, there was no independent verification of the documents, which enabled the employee to
submit fake invoices to hide his unauthorized purchases.

PETTY CASH FUND

As you just learned, better internal control over cash disbursements is possible when companies make
payments by check. However, using checks to pay small amounts is both impractical and a nuisance. For
instance, a company would not want to write checks to pay for postage due, working lunches, or taxi
fares. A common way of handling such payments, while maintaining satisfactory control, is to use a petty
cash fund to pay relatively small amounts. The operation of a petty cash fund, often called an imprest
system, involves (1) establishing the fund, (2) making payments from the fund, and (3) replenishing the
fund.

Imprest System

It is a system of control of cash which requires that all cash receipts should be deposited intact, and all
cash disbursements should be made by means of check.

Imprest Fund System Fluctuating Fund System (updated)

A check is drawn to establish the fund.
Petty Cash Fund xx Petty Cash Fund xx
Cash in Bank xx Cash in Bank xx
Payment of expenses out of fund
No formal journal entries Expenses xx
Petty Cash Fund xx
Replenishment of Petty Payments
Expenses xx Petty Cash Fund xx
Cash in Bank xx Cash in Fund xx
Adjustment of unreplenished expenses
Expenses xx No adjusting journal entries
Cash in Bank xx
An increase in the fund is recorder as follows:
Petty Cash Fund xx Petty Cash Fund xx
Cash in Bank xx Cash in Fund xx
A decrease in the fund is recorded as follows:
Cash in Bank xx Cash in Bank xx
Petty Cash Fund xx Petty Cash Fund xx
Entry to record Cash Shortage
Cash Short or Over xx
Cash xx
If the Cashier or cash custodian is held responsible, the adjustment is
Due from Cashier xx
Cash short or over xx
If the reasonable efforts fail to disclose the cause of the shortage, the adjustment is
Loss from Cash Shortage xx
Cash short or over xx

Entry to record Cash Overage

Cash xx
Cash short or over xx
If there is no claim on the overage, the adjustment is
Cash short or over xx
Miscellaneous Income xx
If the cash overage is properly found to be the money of the cashier the adjustment is
Cash short or over xx
Payable to Cashier xx

Under the imprest fund system, only a formally signed petty cash voucher for payments of expenses is
needed by the petty cash custodian and only memorandum entries are simply prepared in the petty
cash journal. Disbursements are normally recorded upon replenishment of the fund. In effect, the
balance after replenishment is equal to the balance during the establishment of the fund.

- Under the fluctuating fund system, disbursements are immediately recorded in contrast with the
imprest fund system.

Under the imprest fund system, replenishment of the fund is usually equal to the petty cash
disbursements. Replenishment should only be by means of drawing checks not from undeposited
collections.

- Under the fluctuating fund system, replenishment of the fund may or may not be the same amount as
the petty cash disbursement.

Under the imprest fund system, it is necessary to adjust the unreplenished expenses in order to state
the correct balance of the fund.

- Under the fluctuating fund system, no adjustment is needed because of outright recording of the
expenses.

Under the fluctuating fund system, the fund balance may still be increased despite an increased effect in
the fund balance during the replenishment.

Subsidiary Ledgers
companies use subsidiary ledgers to keep track of individual balances.
is a group of accounts with a common characteristic (for example, all accounts receivable).
It is an addition to and an expansion of the general ledger.
The subsidiary ledger frees the general ledger from the details of individual balances.

Two common subsidiary ledgers are as follows.

1. The accounts receivable (or customers') subsidiary ledger, which collects transaction data of individual
customers.

2. The accounts payable (or creditors') subsidiary ledger, which collects transaction data of individual
creditors.

In each of these subsidiary ledgers, companies usually arrange individual accounts in alphabetical order.

A general ledger account summarizes the detailed data from a subsidiary ledger.

The general ledger account that summarizes subsidiary ledger data is called a control account.

At the end of an accounting period, each general ledger control account balance must equal the
composite balance of the individual accounts in the related subsidiary ledger.

A subsidiary ledger is separate from the general ledger. Accounts receivable is a control account.

Advantages of Subsidiary Ledgers

Subsidiary ledgers have several advantages:

1. They show in a single account transaction affecting one customer or one creditor, thus providing up‐
to‐date information on specific account balances.

2. They free the general ledger of excessive details. As a result, a trial balance of the general ledger does
not contain vast numbers of individual account balances.

3. They help locate errors in individual accounts by reducing the number of accounts in one ledger and
by using control accounts.

4. They make possible a division of labor in posting. One employee can post to the general ledger while
someone else posts to the subsidiary ledgers.

SPECIAL JOURNALS

To expedite journalizing and posting.

To record similar types of transactions.
To permit greater division of labor.
The types of transactions that occur frequently determine what special journals the business entity uses.

Postings are also made daily to individual ledger accounts in the inventory subsidiary ledger to maintain
a perpetual inventory.
Sales Journal – used for all sales of merchandise on account.

The entry at selling price is a debit to Accounts Receivable (a control account) and a credit of equal
amount to Sales Revenue.
an explanation is not required for each entry in a special journal.
the use of prenumbered invoices ensures that all invoices are journalized and no invoices are duplicated.
the reference (Ref.) column is not used in journalizing.
It is used in posting the sales journal, as explained in the next section.

Companies make daily postings from the sales journal to the individual accounts receivable in the
subsidiary ledger. Posting to the general ledger is done monthly.

A check mark (✓) is inserted in the reference column to indicate that the daily posting to the customer's
account has been made.
If the subsidiary ledger accounts were numbered, the account number would be entered in place of the
check mark.
the reference S1 indicates that the posting came from page 1 of the sales journal.

Advantages of the Sales Journal

The use of a special journal to record sales on account has a number of advantages.
First, the one‐line entry for each sales transaction saves time. In the sales journal, it is not necessary to
write out the four account titles for each transaction.
Second, only totals, rather than individual entries, are posted to the general ledger. This save posting
time and reduces the possibilities of errors in posting.
Finally, a division of labor results because one individual can take responsibility for the sales journal.

SALES JOURNAL (All merchandises on account)

For the sales journal

a. Each entry results in a debit to Accounts Receivable and a credit to Sales Revenue at selling price; and
a debit to Cost of Goods Sold and a credit to Inventory at cost.
b. Only one line is needed to record each transaction.
c. All entries are made from sales invoices.
d. Postings are made daily to the individual accounts receivable in the subsidiary ledger and monthly, in
total, to Accounts Receivable, Sales Revenue, Cost of Goods Sold and Inventory in the general ledger.

Cash Receipts Journal

The most common types of cash receipts are cash sales of merchandise and collections of accounts
receivable.

The cash receipts journal is a columnar journal with debit columns for cash and sales discounts, and
credit columns for accounts receivable, sales, and “other” accounts.

In addition, there is a separate column for a debit to Cost of Goods Sold and a credit to Inventory.

In journalizing cash receipts transactions: a. Only one line is needed for each entry. b. Each sale entry is
accompanied by another entry that debits Cost of Goods Sold and credits Inventory for cost.

a cash receipts journal includes the following columns: debit columns for Cash and Sales Discounts, and
credit columns for Accounts Receivable, Sales Revenue, and “Other Accounts.”

A subsidiary ledger account is credited when the entry involves a collection of accounts receivable. A
general ledger account is credited when the account is not shown in a special column (and an amount
must be entered in the Other Accounts column). Otherwise, no account is shown in the “Account
Credited” column.

Posting the Cash Receipts Journal

1. At the end of the month, the company posts all column totals, except for the Other Accounts total, to
the account title(s) specified in the column heading (such as Cash or Accounts Receivable). The company
then enters account numbers below the column totals to show that they have been posted.
2.The company separately posts the individual amounts comprising the Other Accounts total to the
general ledger accounts specified in the Account Credited column. See, for example, the credit posting
to Share Capital—Ordinary. The total amount of this column has not been posted. The symbol (X) is
inserted below the total to this column to indicate that the amount has not been posted.

3. The individual amounts in a column, posted in total to a control account (Accounts Receivable, in this
case), are posted daily to the subsidiary ledger account specified in the Account Credited column.

Purchases Journal

a. Each entry results in a debit to Inventory and a credit to Accounts Payable.

b. Only one line is needed to record each transaction.
c. All entries are made from purchase invoices. d. Postings are made daily to the individual creditor
accounts in the accounts payable subsidiary ledger and monthly, in total, to Inventory and Accounts
Payable in the general ledger.

The purchases journal can be expanded into a columnar journal by adding columns for supplies and
other accounts.

A single‐column purchases journal needs only to be footed to prove the equality of debits and credits.

The journalizing procedure is similar to that for a sales journal.

Postings to subsidiary ledger accounts are done daily because it is often necessary to know a current
balance for the subsidiary accounts.
Cash Payments Journal

The cash payments journal has multiple columns because cash payments may be made for a variety of
purposes.
a. The journalizing procedures are similar to those described earlier for the cash receipts journal.
b. All entries are made from prenumbered checks.
c. The posting procedures are like those described earlier for the cash receipts journal.

Effects of Special Journals on General Journal:

Only transactions that cannot be entered in a special journal are recorded in the general journal.
When the entry involves both control and subsidiary accounts the following modifications are required:
a. In journalizing, both the control and subsidiary accounts must be identified.
b. In posting, there must be a dual posting: once to the control account and once to the subsidiary
account.

In General Journal:

Accounts to be written could be : Depreciation Expense – Accumulated Depreciation; Allowance for

doubtful accounts-doubtful account expense; sales return and allowances; purchase return and
allowances.

Payroll Accounting
EMPLOYEE

 Refers to any individual who is a recipient of salaries or wages

 Includes an officer, employee or elected official of the Government of the Philippines or any
political subdivision, agency or instrumentality thereof
EMPLOYER

 A person for whom an individual performs or performed any service, of whatever nature, as the
employee of such person

PAYROLL

 Refers to the total amount paid to employees for services provided during a period

PAYROLL PERIOD

 A period for which an employer ordinarily makes payment of salaries or wages to the employees

GROSS PAY

 The term salary is usually applied to managerial, supervisory, and administrative services.

 Remuneration for skilled or unskilled labor is ordinarily referred to as wages.

 The total earnings of an employee for a payroll period before taxes and other deductions are
taken out, is called gross pay.

EMPLOYEE BENEFITS

 Social Security System (SSS)

 Employees’ Compensation (EC) Program

 Workers’ Investment and Saving Program (WISP)

 National Health Insurance Program

 Pag-IBIG Fund

SOCIAL SECURITY SYSTEM MANDATE

To manage sound and viable social security system which shall promote social justice and provide
meaningful protection to members and their families against the hazards of disability, sickness,
maternity. Old age, death and other contingencies resulting in loss of income or financial burden.

EMPLOYEES' COMPENSATION (EC) PROGRAM

 aims to assist workers who suffer work-connected sickness or injury resulting in disability or
death

WORKERS' INVESTMENT AND SAVING PROGRAM (WISP)

 A provident fund scheme managed by SSS intended as another savings for private-sector
workers and other individual members. It was implemented in January 2021 as part of the
landmark provisions under Republic Act No. 11199 (the Social Security Act of 2018).

 The program aims to help members to raise their savings for higher retirement benefits in the
future.
  All private-sector employees, self-employed individuals, OFW, and voluntary members who
have no final claim in the regular SSS program, have contributions in the regular SSS program,
and have a monthly salary credit (MSC) that exceeds P20,000 are automatically covered by the
program.

NATIONAL HEALTH INSURANCE PROGRAM (NHIP) (5% = 2.5) (Formula = Grosspay * 2.5%)

 The Philippine Health Insurance Corporation (PhilHealth) is mandated to implement the National
Health Insurance Program (NHIP) through Republic Act (RA) 10606 or the National Health
Insurance Act (NHIA) of 2013 which amended RA 7875 (NHIA of 1995).

 The program aims to provide health insurance coverage and ensures access to cost-effective and
quality health care services for all Filipinos.

PAG-IBIG FUND (200 fixed)

Pag-IBIG is an acronym which stands for Pagtutulungan sa Kinabukasan: Ikaw, Bangko, Industriya at
Gobyerno.

The birth of the Home Development Mutual Fund (HDMF), more popularly known as the Pag-IBIG Fund,
was an answer to the need for a national savings program and an affordable shelter financing for the
Filipino worker.

The Fund was established on 11 June 1978 by virtue of Presidential Decree No. 1530 primarily to
address these two basic yet equally important needs.

The maximum monthly salary used for Pag-IBIG contribution computation is Php 10,000. This means if
your monthly salary is Php 10,000 or higher, your contribution is computed as follows: Employee's
share: Php 10,000 x 0.02 = Php 200. Employer's share: Php 10,000 x 0.02 = Php 200.

SALARY DEDUCTIONS

 Social Security System (SSS) Contribution

 PhilHealth Contribution

 Pag-IBIG Contribution

 Withholding taxes

WITHHOLDING TAXES

 Withholding taxes are applied on gross pay after deducting the mandatory employee
contributions.

 Revised withholding tax table under R.A. 10963 or TRAIN Law is shown below.
NET PAY

Gross pay for payroll period less the payroll deductions -- SSS, PhilHealth, and Pag-IBIG contributions of
the employee; withholding taxes; union dues and other deductions -- equals net pay.

Net pay or take-home pay is the amount to be paid to the employee.

THE PAYROLL SYSTEM

To make payroll accounting accurate and timely, accountants have developed the payroll system. The
components of the payroll system follow:

TIME CARDS

A payroll system should include an accurate and reliable record of the employees' work hours during a
particular payroll period. Employee time records are usually maintained in time cards.

Time cards may be filled in either manually or through time clocks. Both systems record the daily arrival
and departure times of each employee.

PAYROLL REGISTER

Each pay period, the entity organizes the payroll data in a special journal called the payroll register. This
register lists each employee and the related payroll amounts. This journal also serves as the basis for
preparing the payroll journal entries.

EMPLOYEE EARNINGS RECORD

Each employer must keep a detailed record of earnings and withholdings for each employee in an
employee earnings record. This form is designed to help the employer meet various reporting
requirements. The sections of this record are the same as that of a payroll register; however, the
record maintains a cumulative gross pay column and additional data on employment specifics like SSS
number, PhilHealth identification number, taxpayer's identification number, pay rate, date of
employment, and tax status.

PAYSLIP, CHECK, OR ATM

If payments of salaries or wages are made in cash, payroll slips should be prepared for every payroll
period. A pay slip is prepared for each employee; each slip contains the pertinent payroll figures
found in the payroll register. The employee upon receipt of cash signs this slip and a duplicate copy is
given to him.

Most employers with a large number of employees use a special bank account to disburse paychecks to
employees. Other employers do away with writing numerous checks and instead pay their employees
through their automated teller machine (ATM) accounts. The bank is simply notified of the amounts to
be credited to the account of each employee.