THEORY SUMMARY NOTES

BY: Rheza

Internal Controls over Cash

Internal control – action/process that is effected by management for them to achieve entity’s objective:
For control such as action of theft and fraud. Such as:

 Reliable representation of their financial report

 Effective and efficient – operations
 Safeguarding their assets
 Compiles with the law and regulations

Example of Internal control:

1) Segregation of incompatible duties- is must divided the part of the works. It has to be
separated and segregated of different employees. DUTIES are (a) AUTHORIZATION (b)
EXECUTION (c) RECORDING (d) CUSTODY(treasurer) . – must be separated.
2) Imprest System – is that all disbursements of the company shall made thru checks and cash
collections shall be deposited intact. (Petty cash fund – for small amounts only)
3) Bank Reconciliation- should be prepared upon the receipts of bank statement or regularly to
update the difference of cash balance per book and cash balance per bank statement
4) Cash Counts- periodic cash counts should be performed to tallies actual cash. Surprise count
should be performed irregular intervals as part of internal audit.
5) Minimum cash balance- should be maintain especially for cash funds
6) Lockbox accounts- it expedite cash collections and ensured it is deposited intact. It is rented for
a fee. It is empty by the bank once a day.
7) Non encashment of personal checks from petty cash funds
8) Voucher system- under this all cash disbursement shall have a voucher for each disbursement
to properly authorized

VOUCHER SYSTEM

VOUCHER (CDV) – Check Disbursement Voucher are written to support every disbursement
made.

ACCOUNTING FOR CASH SHORTAGE AND OVERAGE

CASH SHORTAGE- in the cash count it appears less than the written cash on hand. So to correct we need
to debit “Cash shortage or overage”. To lessen the cash on hand and to correct and to make it equal.
The entry would look like this:

Dr. Cash shortage or overage xxxx

Cr. Cash on hand xxxx

SHORTAGE MAY BE:

 Receivable from employee or

 Loss if it was investigated

The entry will look like this:

Dr. Receivable from cashier/ Loss on cash shortage xxxx

Cr. Cash shortage or overage xxxx

CASH OVERAGE- in the cash count it appears to have more cash than the entry of cash on hand.

So we need to debit “Cash on hand” and credit “Cash short or overage”.

Entry:

Dr. Cash on hand xxxx

Cr. Cash short or overage xxxx

It could be:

 A payable to employee
 A gain

So the entry would look like this:

Dr. Cash short or overage xxxx

Cr. Payable to employee/Miscellaneous income xxxx

CONCEALMENT OF CASH SHORTAGES

1) Lapping- is the casher/bookkeeper collects cash from customer and didn’t record, and another
customer collection then the cashier put it into the account of the former customer. That is
overlapping
2) Kitting - occurs when cash shortage is concealed by overstating the balance of cash.
3) Window dressing (cooking the books) - is form OF FRAUDULENT FINANCIAL REPORTING. When
books are not closed on the year end and transactions in the subsequent period are deliberately
recorded.