Cash Control: Financial Accounting and Reporting

CASH CONTROL
FINANCIAL ACCOUNTING AND REPORTING

By Sir Orly Manalang
cash.control.by.sir.orly.manalang
What’s in the menu?
• Internal controls
over cash
over cash
• Accounting for
petty cash fund
over cash
• Accounting for
petty cash fund
• Bank
reconciliation
over cash
• Accounting for
petty cash fund
• Bank
reconciliation
• Concealment of
Cash shortages
INTERNAL CONTROL
INTERNAL CONTROL is any action or process effected by
management that is designed to help an entity achieve its
objectives. Such objectives may be categorized as follows:
INTERNAL CONTROL
• RELIABILITY of financial reporting,
INTERNAL CONTROL
• EFFECTIVENESS AND EFFICIENCY of operations,
INTERNAL CONTROL
• COMPLIANCE with laws and regulations, and
INTERNAL CONTROL
• COMPLIANCE with laws and regulations, and
• SAFEGUARDING of assets.
INTERNAL CONTROLS OVER CASH
examples
• SEGREGATION OF INCOMPATIBLE
DUTIES
• CASH COUNTS
• MINIMUM CASH BALANCE
• LOCKBOX ACCOUNTS
• VOUCHER SYSTEM
• IMPREST SYSTEM
• BANK RECONCILIATION
examples
DUTIES The duties of
• CASH COUNTS - CUSTODY,
• MINIMUM CASH BALANCE - AUTHORIZATION,
• LOCKBOX ACCOUNTS - RECORDING, and
• VOUCHER SYSTEM
- EXECUTION
• IMPREST SYSTEM
• BANK RECONCILIATION over cash should be
segregated.
examples
• MINIMUM CASH BALANCE - AUTHORIZATION,
R E
A
- RECORDING, and
SC
• VOUCHER SYSTEM
- EXECUTION
• IMPREST SYSTEM
• BANK RECONCILIATION over cash should be
segregated.
examples
Purchases are approved by the
Manager (AUTHORIZATION),
- AUTHORIZATION,
• LOCKBOX
purchases ACCOUNTS
are made by the Purchasing - RECORDING, and
• VOUCHER
Department SYSTEM
(EXECUTION), payment
checks are released to payees by the
- EXECUTION
• IMPREST SYSTEM
Treasurer
• BANK(CUSTODY), and purchase
RECONCILIATION
over cash should be
transactions are journalized by the segregated.
Accountant (RECORDING).
examples
• SEGREGATION OF INCOMPATIBLE Periodic cash counts should be
DUTIES performed to provide reasonable
• CASH COUNTS assurance that actual cash tally
• MINIMUM CASH BALANCE with the balance per books.
• LOCKBOX ACCOUNTS Reconciliation of physical count
and balance per records should
• VOUCHER SYSTEM
be made immediately after the
• IMPREST SYSTEM count. Surprise counts should
• BANK RECONCILIATION also be performed at irregular
intervals as part of internal audit.
examples
• SEGREGATION OF INCOMPATIBLE Minimum cash balance should be
DUTIES maintained, especially for cash
• CASH COUNTS funds, sufficient only to defray
• MINIMUM CASH BALANCE specific business requirements.
For example, entities often use
imprest bank accounts which are
• VOUCHER SYSTEM amounts specifically set aside for a
• IMPREST SYSTEM limited purpose such as for the
• BANK RECONCILIATION payment of payroll, interest, or
taxes. Maintaining excessive cash
balances may increase the risk of
embezzlement
examples
• SEGREGATION OF INCOMPATIBLE Entities often utilize lockbox
DUTIES accounts to expedite cash
• CASH COUNTS collections and to ensure that
• MINIMUM CASH BALANCE cash collections are deposited
• LOCKBOX ACCOUNTS intact. A lockbox is rented for a fee
and customers are advised to
• VOUCHER SYSTEM remit their payments directly to
• IMPREST SYSTEM the lockbox account. The bank
• BANK RECONCILIATION empties the box at least once a
day and immediately credits the
entity’s account for collections.
examples
The voucher system is an
DUTIES
internal control over all cash
• CASH COUNTS disbursements. Under this
• MINIMUM CASH BALANCE system, a voucher is prepared
• LOCKBOX ACCOUNTS for every cash disbursement in
• VOUCHER SYSTEM order to ensure that each
• IMPREST SYSTEM disbursement is properly
• BANK RECONCILIATION authorized, made for a valid
expenditure, and properly
recorded.
examples
• SEGREGATION OF INCOMPATIBLE The imprest system requires that all
DUTIES cash receipts should be deposited
• CASH COUNTS intact within a reasonable period of
time from the date of collection and
should not be used for any type of
• LOCKBOX ACCOUNTS disbursement.
• VOUCHER SYSTEM The system also requires that all cash
disbursements should be made
• IMPREST SYSTEM through checks and not from cash
• BANK RECONCILIATION collections. Disbursements for small
amounts are made through the petty
cash fund.
examples
• SEGREGATION OF INCOMPATIBLE Bank reconciliation should be
DUTIES prepared regularly, immediately
• CASH COUNTS upon the receipt of the monthly bank
statement, to reconcile on a timely
basis the differences between the
• LOCKBOX ACCOUNTS cash balance per books and the cash
• VOUCHER SYSTEM balance per bank statement. The
differences should be duly
• IMPREST SYSTEM investigated and accounted for.
• BANK RECONCILIATION
over cash
• Accounting for
petty cash fund
• Bank
reconciliation
• Concealment of
Cash shortages
ACCOUNTING FOR PETTY CASH FUND
IMPREST FUND SYSTEM FLUCTUATING FUND SYSTEM
FUND LEVEL IS FUND LEVEL IS NOT

MAINTAINED MAINTAINED
UPON ESTABLISHMENT: UPON ESTABLISHMENT:
PETTY CASH FUND XX PETTY CASH FUND XX

CASH IN BANK XX CASH IN BANK XX
UPON DISBURSEMENT OUT UPON DISBURSEMENT OUT

FROM THE FUND: FROM THE FUND:
VARIOUS EXPENSES XX
NO ENTRY PETTY CASH FUND XX
UPON REPLENISHMENT: UPON REPLENISHMENT:
VARIOUS EXPENSES XX PETTY CASH FUND XX

CASH IN BANK XX CASH IN BANK XX
AT YEAR-END: AT YEAR-END:
ADJUSTMENT IS REQUIRED NO ADJUSTMENT NEEDED

FOR THOSE UNREPLENISHED
PETTY CASH VOUCHERS
CASH SHORT OR OVER ACCOUNT
When the cash count differs from what the record is saying to what is
the balance should be, there is a shortage or an overage.
• The entry to record the replenishment when there is a petty cash shortage is
VARIOUS EXPENSES XX
CASH SHORTAGE OR OVERAGE XX
CASH IN BANK XX
• The entry to record the replenishment when there is a petty cash overage is
VARIOUS EXPENSES XX
CASH SHORTAGE OR OVERAGE XX
CASH IN BANK XX
over cash
• Accounting for
petty cash fund
• Bank
reconciliation
• Concealment of
Cash shortages
BANK RECONCILIATION
A bank reconciliation is a process which brings into
agreement the cash balance per book and cash balance per
bank.
A bank reconciliation statement is usually prepared monthly

because the bank provides the depositor with the bank
statement at the end of every month.
BOOK RECONCILING ITEMS
• CREDIT MEMOS
• DEBIT MEMOS
• BOOK ERRORS
• CREDIT MEMOS - These are additions or bank credits made by the
bank to the entity’s account but not yet recorded by the entity
Collections made by the bank on behalf of the entity.
Proceeds from loan directly credited by the bank to the entity’s
account.
Matured time deposits transferred by the bank to the entity’s
account.
• DEBIT MEMOS - These are deductions or bank debits made by the bank
to the entity’s account but not yet recorded by the entity
Bank service charges for checkbook, interest, collection,
accommodations, penalties, and surcharges.
No Sufficient Fund checks (NSF) or Drawn Against Insufficient
Fund (DAIF) – checks that are deposited and already recorded by
the bank and subsequently returned to the entity because the
drawer’s fund is insufficient to pay the check.
Automatic Debits such as when the entity and the bank agree
that the bank will make automatic payments of bills on behalf of
the entity
Payment of loans which the entity agreed to be made out directly
from its bank account.cash.control.by.sir.orly.manalang
BANK RECONCILING ITEMS
• DEPOSIT IN TRANSIT
• OUTSTANDING CHECKS
• BANK ERRORS
• DEPOSIT IN TRANSIT – These are deposits already made but not yet
received by the bank or received by the bank but due to cut-off policy
are not yet included (credited) in the depositor’s bank statement.
Deposits in transit often occur when deposits are mailed to the bank,
placed in an overnight depository, or deposits are made after the
bank’s cut-off.
• OUTSTANDING CHECKS – These are checks drawn and released to payees,
therefore recorded by the entity, but are not yet presented for
encashment to the bank.
Certified checks should not be treated as outstanding checks. The bank,

when certifying checks, automatically debits (reduces) the entity’s account
and assumes direct liability on paying the certified checks to the payee.
Certified checks are already deducted from the account, thus, they are no
longer outstanding.
Checks that remain outstanding for a relatively long period of time may
be considered as stale and may appropriately be reverted back to cash.
METHODS OF BANK RECONCILIATION
• ADJUSTED BALANCE METHOD
• BOOK TO BANK METHOD
• BANK TO BOOK METHOD
ADJUSTED BALANCE METHOD
BOOK BANK
UNADJUSTED BALANCED UNADJUSTED BALANCE
+ CREDIT MEMO + DEPOSIT IN TRANSIT
- DEBIT MEMO - OUTSTANDING CHECKS
+/- BOOK ERRORS +/- BOOK ERRORS
ADJUSTED BALANCE ADJUSTED BALANCE
BOOK TO BANK METHOD
BOOK BANK
BANK TO BOOK METHOD
BOOK BANK
over cash
• Accounting for
petty cash fund
• Bank
reconciliation
• Concealment of
Cash shortages
CONCEALMENT OF CASH
• LAPPING
• KITING
• WINDOW DRESSING
CONCEALMENT OF CASH
• LAPPING LAPPING occurs when collection
of receivable from one customer
• KITING
is misappropriated and then
• WINDOW DRESSING concealed by applying a
subsequent collection from
another customer. Lapping is
made possible when the
incompatible duties of recording
and cash custody are combined
CONCEALMENT OF CASH
• LAPPING KITING occurs when cash
• KITING shortage is concealed by
• WINDOW DRESSING overstating the balance of
cash. Kiting is made possible
by exploiting the float period
– the time it needs for a
check to clear at the bank
where it was drawn).
CONCEALMENT OF CASH
• LAPPING WINDOW DRESSING is a form of
fraudulent financial reporting and
• KITING not primarily a method of concealing
• WINDOW DRESSING cash shortages. Window dressing
occurs when books are not closed at
year-end and transactions in the
subsequent period are deliberately
recorded in the current period in
order to improve the entity’s financial
performance.

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CASH CONTROL

FINANCIAL ACCOUNTING AND REPORTING

FUND LEVEL IS FUND LEVEL IS NOT

UPON ESTABLISHMENT: UPON ESTABLISHMENT:

PETTY CASH FUND XX PETTY CASH FUND XX

UPON DISBURSEMENT OUT UPON DISBURSEMENT OUT

UPON REPLENISHMENT: UPON REPLENISHMENT:

VARIOUS EXPENSES XX PETTY CASH FUND XX

ADJUSTMENT IS REQUIRED NO ADJUSTMENT NEEDED

A bank reconciliation statement is usually prepared monthly

Certified checks should not be treated as outstanding checks. The bank,

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