CONCEPTUAL
An internal control system consists of the policies
and procedures managers use to protect assets, ensure reliable
accounting, promote efficient operations, and urge adherence to company
policies. It can prevent avoidable losses and help managers both plan
operations and monitor company and human
performance. Principles of good internal control include establishing
responsibilities, maintaining adequate records, insuring assets and
bonding employees, separating recordkeeping from custody
of assets, dividing responsibilities for related
transactions, applying technological controls, and performing regular
independent reviews.
Cash includes currency,
coins, and amounts on (or acceptable for) deposit in checking and savings
accounts. Cash equivalents are short-term, highly liquid investment assets readily
convertible to a known cash amount and sufficiently close to their
maturity date so that market value is not sensitive to interest rate
changes. Cash and cash equivalents are liquid assets because
they are readily converted into other assets or can be used to pay
for goods, services, or liabilities.
ANALYTICAL
Many companies attract customers by selling
to them on credit. This means that cash receipts from customers
are delayed until accounts receivable are collected. Users want to know
how quickly a company can convert its accounts receivable into cash.
The days’ sales uncollected ratio, one measure reflecting company liquidity, is computed by dividing
the ending balance of receivables by annual net sales, and then multiplying
by 365.
PROCEDURAL
Internal control of cash receipts ensures that
all cash received is properly recorded and deposited. Attention
focuses on two important types of cash receipts: over-the-counter and
by mail. Good internal control for over-the-counter cash receipts includes use
of a cash register, customer review, use of receipts, a permanent
transaction record, and separation of the custody of cash from its
recordkeeping. Good internal control for cash receipts by mail
includes at least two people assigned to open mail and a listing of
each sender’s name, amount, and explanation. (Banks offer several services that promote the control
and safeguarding of cash.).
Petty cash disbursements are
payments of small amounts for items such as postage, courier fees, minor repairs, and supplies. A
company usually sets up one or more petty cash funds. A petty cash fund
cashier is responsible for safekeeping the cash, making payments from
this fund, and keeping receipts and records. A Petty Cash
account is debited only when the fund is established or increased in
amount. When the fund is replenished, petty cash disbursements are
recorded with debits to expense (or asset) accounts and a credit to Cash.
A bank reconciliation proves the accuracy
of the depositor’s and the bank’s records. The bank statement balance is
adjusted for items such as outstanding checks and unrecorded deposits made on or before the
bank statement date but not reflected on the statement. The book
balance is adjusted for items such as service charges, bank collections
for the depositor, and interest earned on the account.
A voucher system is a set of procedures
and approvals designed to control cash disbursements and acceptance
of obligations. The voucher system of control relies on several
important documents, including the voucher and its supporting files. A key factor in this system is that
only approved departments and individuals are authorized to incur certain
obligations.
The net method aids management in monitoring and
controlling purchase discounts. When invoices are recorded at
gross amounts, the amount of discounts taken is deducted from the balance
of the Inventory account. This means that the amount of any discounts lost is
not reported in any account and is unlikely to come to the
attention of management. When purchases are recorded at net amounts, a Discounts Lost account is brought to management’s attention
as an operating expense. Management can then seek to identify the
reason for discounts lost, such as oversight, carelessness, or
unfavorable terms.
Guidance
Answers to Decision Maker
Entrepreneur
To achieve proper separation of duties, a minimum of three
employees are required. Transaction
authorization, recording, and asset custody are ideally handled by three employees. Many small businesses
do not employ three workers. In
such cases, an owner must exercise more oversight to make sure that the lack of separation
of duties does not result in fraudulent transactions.
Sales
Representative
A salesperson can take several steps to reduce days’ sales uncollected.
These include (1) decreasing the
ratio of sales on account to total sales by encouraging more cash sales, (2) identifying
customers most delayed in their payments and encouraging earlier payments or cash sales, and (3) applying stricter credit
policies to eliminate credit sales to customers that never pay.
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