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Cash: is it under control?

Each business man and woman knows the importance of cash to the smooth running of a firm. One major reason for small business failure is insufficient liquidity, often described as "just not enough cash." Accountants and clients alike must have enough cash available for current operations and to meet obligations as they come due. Too much cash, however, is unproductive and can lose value if left sitting idle for too long, and its portability makes cash extremely vulnerable to theft. Clearly, this most liquid of assets needs careful watching!

Exactly What Is Cash?

But just what are we watching? That is, what do we mean when we say "cash"?

In order to be included in the category, funds must be readily available, not restricted for use in paying current obligations and acceptable for deposit at face value by a bank or other financial institution.

Clearly, currency and coin are cash. Demand deposits (checking, savings and money market accounts), petty cash funds and such negotiable items as travelers' checks, cashiers checks, bank drafts and money orders are also cash. Money deposits that are not immediately available for withdrawal (certificates of deposit and money market savings accounts) are considered temporary investments. Items that are not acceptable at face value, such as IOUs, NSF checks and post-dated checks, are essentially receivables and thus excluded from "cash."

The Importance of Internal Controls

Careful management of this resource can be achieved with some simple internal control measures. Basic rules include separating responsibilities relating to cash; thus, the same person with access to the cash doesn't have access to the accounting records about the cash. As a result of this separation of duties, a thief will need the cooperation of at least one other person.

Generally such control is easier in large firms than in small ones, where one person may have to carry out several functions. However, the use of simple rules such as recording and depositing receipts promptly, bonding employees, paying bills only by check, conducting surprise audits of cash-on-hand and monthly reconciliations of cash, and limiting the number of people with access to cash should keep security issues at a minimum regardless of firm size.

When it is not practical to make a payment by check (for instance, the mail carrier stops at the front desk with a bill for 9|cents~ postage due), a petty cash fund simplifies such tasks. However, this fund needs careful supervising to prevent unauthorized use. The use of a voucher or some written authorization bearing the date, purpose and signature of the recipient for each distribution from the petty cash fund will help maintain the fund at its appropriate amount. Occasional unannounced audits of the fund will also reduce the opportunity for theft.

One of the most valuable tools to maintain a watchful eye on cash is the bank statement reconciliation. Seldom does the balance of a company's cash account equal the cash balance shown on a monthly bank statement. Transactions done on our behalf by the bank which we have not recorded and checks and deposits not yet received by the bank will contribute to differing amounts of cash. We all know someone who never bothers with analyzing these differences but assumes that the bank is always right!

While bank records are usually quite precise, the accuracy of company records is the business' responsibility, not the bank's. A few minutes each month gathering the necessary data and reconciling the account will give you the confidence that your records are up to date and cash is well safeguarded.

No set of internal control policies, however carefully followed, can prevent a determined and clever person from effecting a well-planned theft. But without such policies, the responsibility for safeguarding company assets and providing reliable accounting information is abdicated. Without cash and accurate records about cash, most small businesses will soon close their doors.

To practice your skill, complete a detailed bank reconciliation from the information that follows and prepare any journal entries made necessary by the data. The answer will be provided next month.

November Quiz

The books of Roars Unlimited show a cash balance of $23,383 as of October 31. Roars' bank statement shows a cash balance for the company of $21,432. Additional information which might be useful in reconciling the disparity follows:

1. A deposit of $800 was recorded by the bank on Oct. 3, but it should have been recorded for Shores Limited, not Roars Unlimited.

2. Petty cash of $425 was included in the cash balance. An actual count shows $516 on hand.

3. Check #315 in payment of electric bill for $125 was correctly recorded by the bank but was recorded by Roars as $215.

4. The bank statement did not show receipts of $1,250, deposited on Oct. 31.

5. The bank statement indicated a monthly service charge of $35.

6. A check for $372 was returned marked NSF. The check had been included in the Oct. 24 deposit. As of Oct. 31, the check had not been redeposited.

7. Proceeds from cash sales of $1,530 for Oct. 19 were stolen. The company expects to recover this amount from the insurance company. The cash receipts were recorded in the books, but no entry was made for the loss.

8. A check for $2,560 cleared the bank on Oct. 29. It was a transfer to the payroll account at the same bank. On Oct. 31, all but $1,255 of payroll checks had been processed at the bank.

9. Interest of $56 has accrued during October on funds invested for Roars by the bank.

10. Outstanding checks totaled $1,420 as of Oct. 31.

11. The Oct. 22 deposit included a check for $705 returned on Oct. 15 for NSF. Roars Unlimited had made no entry upon return of the check. The redeposit of the check on Oct. 22 was recorded as a collection on account.


Barbara Winicur, CPA, Director of Education & Professional Development
COPYRIGHT 1993 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:cash management
Author:Winicur, Barbara
Publication:The National Public Accountant
Date:Nov 1, 1993
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