Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 7 Sarbanes-Oxley, Internal Control, and Cash 325

For effective control, the bank reconciliation should be prepared by an employee

who does not take part in or record cash transactions. When these duties are not prop-

erly separated, mistakes are likely to occur, and it is more likely that cash will be stolen

or otherwise misapplied. For example, an employee who takes part in all of these du-

ties could prepare and cash an unauthorized check, omit it from the accounts, and omit

it from the reconciliation.

SPECIAL-PURPOSE CASH FUNDS

It is usually not practical for a business to write checks to pay small amounts, such as

postage. Yet, these small payments may occur often enough to add up to a significant

total amount. Thus, it is desirable to control such payments. For this purpose, a spe-

cial cash fund, called a petty cash fund, is used.

A petty cash fund is established by first estimating the amount of cash needed for

payments from the fund during a period, such as a week or a month. After necessary

approvals, a check is written and cashed for this amount. The money obtained from

cashing the check is then given to an employee, called the petty cash custodian, who

is authorized to disburse monies from the fund. For control purposes, the company

may place restrictions on the maximum amount and the types of payments that can be

made from the fund. Each time monies are paid from petty cash, the custodian records

the details of the payment on a petty cash receipt form.

The petty cash fund is normally replenished at periodic intervals or when it is de-

pleted or reaches a minimum amount. When a petty cash fund is replenished, the ac-

counts debited are determined by summarizing the petty cash receipts. A check is then

written for this amount, payable to petty cash.

To illustrate normal petty cash fund entries, assume that a petty cash fund of $500

is established on August 1. The entry to record this transaction is as follows:

SCF BS IS

—AcT —

Bank Error in Your Favor

You may sometime have a bank error in your favor, such as a
misposted deposit. Such errors are not a case of “found money,”
as in the Monopoly®game. Bank control systems quickly

discover most errors and make automatic adjustments. Even so,

you have a legal responsibility to report the error and return

the money to the bank.

INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS

Describe the accounting
for special-purpose cash
funds.

6

At the end of August, the petty cash receipts indicate expenditures for the follow-

ing items: office supplies, $380; postage (office supplies), $22; store supplies, $35; and

miscellaneous administrative expense, $30. The entry to replenish the petty cash fund

on August 31 is as follows:

Aug. 1 Petty Cash 500

Cash 500