Chapter 7 Sarbanes-Oxley, Internal Control, and Cash 315CASH CONTROLS OVER RECEIPTS
AND PAYMENTSCashincludes coins, currency (paper money), checks, money orders, and money on
deposit that is available for unrestricted withdrawal from banks and other financial
institutions. Normally, you can think of cash as anything that a bank would accept for
deposit in your account. For example, a check made payable to you could normally be
deposited in a bank and thus is considered cash.
We will assume in this chapter that a business maintains only onebank account,
represented in the ledger as Cash. In practice, however, a business may have several
bank accounts, such as one for general cash payments and another for payroll. For each
of its bank accounts, the business will maintain a ledger account, one of which may be
calledCash in Bank—First Bank, for example. It will also maintain separate ledger ac-
counts for special-purpose cash funds, such as travel reimbursements. We will intro-
duce some of these other cash accounts later in this chapter.
Because of the ease with which money can be transferred, cash is the asset most
likely to be diverted and used improperly by employees. In addition, many trans-
actions either directly or indirectly affect the receipt or the payment of cash.
Businesses must therefore design and use controls that safeguard cash and control
the authorization of cash transactions. In the following paragraphs, we will discuss
these controls.Control of Cash Receipts
To protect cash from theft and misuse, a business must control cash from the time it is
received until it is deposited in a bank. Businesses normally receive cash from two
main sources: (1) customers purchasing products or services and (2) customers mak-
ing payments on account. For example, fast-food restaurants, such as McDonald’s,
Wendy’s, and Burger King, receive cash primarily from over-the-counter sales to cus-
tomers. Mail-order and Internet retailers, such as Lands’ End,Orvis, L.L. Bean, and
Amazon.com, receive cash primarily through electronic funds transfers from credit
card companies.Cash Received from Cash Sales. Regardless of the source of cash receipts, every
business must properly safeguard and record its cash receipts. One of the most im-
portant controls to protect cash received in over-the-counter sales is a cash register.
When a clerk (cashier) enters the amount of a sale, the cash register normally displays
the amount. This is a control to ensure that the clerk has charged you the correct
amount. You also receive a receipt to verify the accuracy of the amount.
At the beginning of a work shift, each cash register clerk is given a cash drawer
that contains a predetermined amount of cash for making change for customers. The
amount in each drawer is sometimes called a change fund. At the end of the shift, the
clerk and the supervisor count the cash in that clerk’s cash drawer. The amount of cash
in each drawer should equal the beginning amount of cash plus the cash sales for the
day. However, errors in recording cash sales or errors in making change cause the
amount of cash on hand to differ from this amount. Such differences are recorded in
acash short and over account.
At the end of the accounting period, a debit balance in the cash short and over
account is included in Miscellaneous Expense in the income statement. A credit bal-
ance is included in the Other Income section. If a clerk consistently has significant
cash short and over amounts, the supervisor may require the clerk to take additional
training.Describe and illustrate the
application of internal
controls to cash.
3
Q.A cash register begins
with $300, recorded cash
sales are $13,644, and
cash of $13,959 is on
hand. What is the cash
short or over?
A.Cash over is $15.