Cash Receipts and Disbursements

Control of Men2 Marketing

In Dagupan City

Prepared by:

Viray, Nhicole S.

Toribio, Khristine Nilda

De Leon, Jemari T.

Rodas, Marie F.

Taminaya, Sheenary L.

Vinluan, Winston T.

Ducusin, Katherine

Bato, Christian Kent D.

Romero, Jefferson

Prepared to:

Dr. Carmelo John E. Vidal

 Chapter II

REVIEW OF RELATED LITERATURE AND STUDIES

This chapter constitutes the related literature and studies reviewed

by the researchers. The review materials are taken from different

sources which serve as the background in the conceptualization of this

study.

Conceptual Literature

This section presented the related literature that pertains to the

concepts, principles, theories which was gathered, reviewed and was

thoroughly analyzed by the researchers to have a clearer view on what

this study is all about. These concepts that were gathered from journals,

publications and from the internet which were used as a guide to better

understand the internal control over cash receipts and cash

disbursements of Men2 Marketing.

Cash Receipts

A cash receipt is a printed statement of the amount of cash

received in a cash sale transaction. A copy of this receipt is given to

the customer, while another copy is retained for accounting purposes.

(https://www.accountingtools.com/articles/2017/5/5/cash-receipt)
Cash Receipts Cycle

1. Record checks and cash - When the daily mail delivery arrives,

record all received checks and cash on the mailroom check

receipts list. For each check received, state on the form the

name of the paying party, the check number and the amount

paid. If the receipt was in cash, then state the name of the

paying party, check the “cash?” box, and the amount paid. Once

all line items have been completed, enter the grand total in the

“total receipts” field at the bottom of the form. Sign the form and

state the date on which the checks and cash were received. Also,

stamp “for deposit only ” and the company’s bank account

number on every check received; this makes it more difficult for

someone to extract a check and deposit it into some other bank

account.

2. Forward payments - Insert all checks, cash, and a copy of the

mailroom check receipt list into a secure interoffice mail pouch.

Have it hand-delivered to the cashier in the accounting

department. The cashier matches all items in the pouch to the

mailroom check receipt list, initials a copy of the list, and

returns the copy by interoffice mail to the mailroom. The

mailroom staff then files the initialled copy by date.

3. Apply cash to invoices - Access the accounting software, call up

the unpaid invoices for the relevant customer, and apply the

cash to the invoices indicated on the remittance advice that

accompanies each payment from the customer. If there is no

indication of which invoice is to be credited, record the payment

either in a separate account, or as unapplied but within the

account of the customer from whom it came. In the latter

situation, make a photocopy of the check and retain it for

application purposes at a later date, so that the check can still

be deposited on the current date.

4. Deposit cash - Record all checks and cash on a deposit slip .

Compare the total on the deposit slip to the amount stated on

the mailroom check receipts list, and reconcile any differences.

Then store the checks and cash in a locked pouch and transport

it to the bank.

5. Match to bank receipt - Upon receipt of the checks and cash,

the bank issues a receipt for it. Someone other than the cashier

should compare this receipt to the amount on the deposit slip

and reconcile any differences. It may be useful to staple the

receipt to a copy of the deposit slip and file the documents, as

proof that the matching step was completed.

(https://www.accountingtools.com/articles/2017/5/17/cash-

receipts-procedure)

Cash Disbursements

In accounting, cash disbursements, also called cash payments,

refer to payments made by a company during a specified period, such as

quarter or year. It includes payments made by cash, but also by cash

equivalents like checks or electronic fund transfers. Cash disbursements

measure the amount of money that's actually flowing out of a company.

(https://smallbusiness.chron.com/cash-disbursement-accounting-

69985.html)

Cash Disbursements Cycle.

The starting point of a cash disbursement cycle depends upon the

accounting plan of a specific business. The cycle basically works like

this: A company decides to purchase an item or group of items. The

purchasing department places a purchase order, which the accounting

department approves based on available cash resources. The receiving

department receives the order from the supplier on credit. The

accounting department creates all the necessary paperwork for the

purchase and pays the supplier. The payment of the supplier constitutes

the actual cash disbursement.

Cash Disbursements Systems

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.

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.

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.

(file:///C:/Users/Acer%20V5/Downloads/research/8.%20Chapter

%205%20%20The%20Expenditure%20Cycle%20Part%20I%20Purchases

%20and%20Cash%20Disbursements%20Procedures.pdf)

Internal Control

In 1992, the Committee of Sponsoring Organizations of the

Treadway Commission (COSO) developed a model for evaluating internal

controls. This model has been adopted as the generally accepted

framework for internal control and is widely recognized as the definitive

standard against which organizations measure the effectiveness of their

systems of internal control.

The COSO model defines internal control as “a process, effected by

an entity’s board of directors, management and other personnel,

designed to provide reasonable assurance of the achievement of

objectives in the following categories:

 Effectiveness and efficiency of operations

 Reliability of financial reporting

 Compliance with applicable laws and regulations”

In an “effective” internal control system, the following five components

work to support the achievement of an entity’s mission, strategies and

related business objectives.

1. Control Environment

a) Integrity and Ethical Values

b) Commitment to Competence

c) Board of Directors and Audit Committee

d) Management’s Philosophy and Operating Style

e) Organizational Structure

f) Assignment of Authority and Responsibility

g) Human Resource Policies and Procedures

 2.

Risk Assessment

a) Company-wide Objectives

b) Process-level Objectives

c) Risk Identification and Analysis

d) Managing Change

3. 3. Control Activities

a) Policies and Procedures

b) Security (Application and Network)

c) Application Change Management

d) Business Continuity/Backups

e) Outsourcing

4. Information and Communication

a) Quality of Information

b) Effectiveness of Communication

5. Monitoring

a) Ongoing Monitoring

b) Separate Evaluations

c) Reporting Deficiencies

(https://info.knowledgeleader.com/bid/161685/what-are-the-five-

components-of-the-coso-framework)

Internal Control Objectives

 Internal Control objectives are desired goals or conditions for a

specific event cycle which, if achieved, minimize the potential that waste,

loss, unauthorized use or misappropriation will occur. They are

conditions which we want the system of internal control to satisfy. For a

control objective to be effective, compliance with it must be measurable

and observable.

1. Authorization - ensures that all transactions are approved by

responsible personnel in accordance with specific or general

authority before the transaction is recorded.

2. Completeness - ensures that no valid transactions have been

omitted from the accounting records.

3. Accuracy - ensures that all valid transactions are accurate,

consistent with the originating transaction data and information is

recorded in a timely manner.

4. Validity - ensures that all recorded transactions fairly represent

the economic events that actually occurred, are lawful in nature,

and have been executed in accordance with management's general

authorization.

5. Physical Safeguards & Security - ensures that access to physical

assets and information systems are controlled and properly

restricted to authorized personnel.

 6. Error handling - ensures that errors detected at any stage of

processing receive prompt corrective action and are reported to the

appropriate level of management.

7. Segregation of Duties - ensures that duties are assigned to

individuals in a manner that ensures that no one individual can

control both the recording function and the procedures relative to

processing the transaction.

Types of Internal Controls

1. Preventive: Designed to keep errors or irregularities from occurring

in the first place.

2. Detective: Designed to detect errors or irregularities that may have

occurred.

3. Corrective: Designed to correct errors or irregularities that have

been detected.

Limitations of Internal Controls

Some limitations are inherent in all internal control systems. These

include:

1. Judgment: The effectiveness of controls will be limited by decisions

made with human judgment under pressures to conduct business

based on the information at hand.

 2. Breakdowns: Even well designed internal controls can break

down. Employees sometimes misunderstand instructions or

simply make mistakes. Errors may also result from new

technology and the complexity of computerized information

systems.

3. Management Override: High level personnel may be able to

override prescribed policies and procedures for personal gain or

advantage. This should not be confused with management

intervention, which represents management actions to depart from

prescribed policies and procedures for legitimate purposes.

4. Collusion: Control systems can be circumvented by employee

collusion. Individuals acting collectively can alter financial data or

other management information in a manner that cannot be

identified by control systems.

(https://audit.mercer.edu/internal-control/)

Internal Control of Cash Receipts and Disbursements in a

Merchandising Business

When a merchandising company sells its merchandise inventory, it

may receive cash immediately or several days or weeks later. A clerk

receives the cash immediately over the counter, records it, and places it

in a cash register. The presence of the customer as the sale is rung up

usually ensures that the cashier enters the correct amount of the sale in
the cash register. At the end of each day, stores reconcile the cash in

each cash register with the cash register tape or computer printout for

that register.

Payments received later are almost always in the form of checks.

Stores prepare a record of the checks received as soon as they are

received. Some merchandising companies have customers send the

payments directly to the bank instead of the company itself. Although

businesses vary their specific procedures for controlling cash receipts,

they usually observe the following principles:

 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.

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.

 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 canceled 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.

 (h

ttps://courses.lumenlearning.com/sac-finaccounting/chapter/cash-

receipts-and-disbursements/)

Research Literature

This section included the related studies obtained by the

researchers from different research studies of the importance of an

effective internal control of cash receipts and disbursements. These will

help the management to assess and develop the cash receipts and

disbursements of the company and for the betterment of its internal

control.

Wheeler, (2004) emphasized the concept of internal control over

cash in relevant with credit saving, speculative grade rating. He realized

that firms with low internal control quality are more likely to have lower

credit ratings, speculative grade rating, smaller size, lower profitability,

and lower cash flows from operating activities, and net losses in the

current and prior fiscal year, higher income variability and higher

leverage than other firms with high quality controls. Further ,lower

quality controls decrease the likelihood of a firm receiving an investment-

grade debt rating hence resulting in higher cost of debt financing, lower

income and lower overall attractiveness in capital markets for these

firms.
 The importance of using a computerized accounting system has

been revealed by Hardler, (2009) explain in detail when using a

computerized accounting system on the computer input screen have

been designed for ease of use. He said that the main advantage is that

each transaction needs only to be inputted once, unlike a manual double

entry system where two or three entries are required. The computerized

accounting system is fully integrated. This means that when a business

transaction is inputted on the computer it is recorded in a number of

different accounting records at the same time. The advantages of

accounting are many compared to their demerits, these advantages are

speed, accuracy, automatic document production up-to-date

information, availability of information, management information, vat

return, legibility, efficiency, staff motivation, cost savings, the ability to

deal with multiple currencies

In the work of Andrea Weickgenannt, Leslie Turner (2013) entitled,

“Accounting Information Systems: The Processes and Controls, 2nd

Edition” in Chapter 9, the processing flow related to procurement

activities requires that payments be made for purchase obligations that

have been incurred. The cash disbursements process must be designed

to ensure that the company appropriately processes payments to satisfy

its accounts payable when they are due.

 The accounts payable department is generally responsible for

notification of the need to make cash disbursements and the

maintenance of vendor accounts. Before payment is made to a vendor,

specific steps should be taken to enhance the effectiveness and efficiency

of the process. These steps include vendor account reconciliation, cash

management techniques, and payment authorization.

According to Gitman (2008), as cited by Leah Jemutai Barno and

Joseph Kiprotich Tuweicash (July 2017) in their work entitled, “Do Cash

Collections Techniques and Cash Disbursement affect Performance of

State Corporations in Kenya”, disbursement is a function of accounts

payable; it includes all outlays of cash by the firm during a given

financial period. The objective of cash disbursement is to control

payments and minimize the firm’s cost associated with making payment.

According to Rascoe, as cited by Njama (2007) explained more on the

systems of internal control over cash to any kind of business. Without

effective methods place to ensure that funds and resources are being

used in an ethical and efficient way a company may lose money or run

into many other problems. Through establishment of responsibly,

segregation of duties, document procedures and security measures any

company should be able to maintain their funds and feel confident that

their employees are producing accurate and ethical results.

 Also, it was said by Trésor, as cited by Njama (2006) emphasized

the importance of the segregation of duties of cash receipts. If the

employee has access to the physical cash or checks, there is a risk that

the money is stolen and never deposited in the company’s bank account

and that it would be not detected in the bank reconciliation because the

employee himself is doing bank reconciliation and he is preventing

noticing through overdue payments list because he/she is making a fake

entry in the ledger that the invoice to the customer was paid.

In the work of Weygandt, et al, (2004) entitled “Hospitality

Financial Accounting” in Chapter 10, just as cash is the beginning of a

company’s operating cycle, it is also usually the starting point for a

company’s system of internal control. Cash is the one asset that is

readily convertible into any other type of asset. To safeguard cash and to

ensure the accuracy of the accounting records for cash, effective internal

control over cash is imperative. Internal control over cash receipts come

from a variety of sources: cash sales; collections on account from

customers; the receipt of interest, rent, and dividends; investments by

owners; bank loans; and proceeds from the sale of noncurrent assets.

Internal control over cash disbursement, cash may be disbursed

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 payments are made by check rather than by cash.

One exception is for incidental amounts that are paid out of petty cash.

Payment by check generally occurs only after specified control

procedures have been followed. In addition, the “paid” check provides

proof of payment.

Synthesis

The researchers gained insights and knowledge to better

understand the status of the internal control of cash receipts and

disbursements of the Men2 Marketing located in Dagupan City. The

previous and present studies both have their differences and similarities

that have an emphasis on the subject of cash receipts, cash

disbursements and internal control. The previous studies help the

researchers to improve the current study when it comes to analyzing a

better performance of an entity having an effective internal control of

cash. The related studies give the researchers the essential data about

the concepts of a proper cash receipts cycle and cash disbursements

cycle that will help the company prevent or correct asset

misappropriation and theft. The researchers also gained insights on the

disadvantages of not having a good implementation of internal control

which may lead to management override and employee collusion. The

past studies also supported the present study about cash as the most

liquid asset of a company which as one of the most important factors in

expanding and developing a merchandising business may be the closest

reason of the downfall of one’s business because of its weak internal

control over cash receipts and cash disbursements.