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Accounting Principles I – Cash

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    Study Guide Accounting Principles I – Cash 1. Cash Controls Cash is one of the most important assets a company has. It’s also the easiest asset to take or misuse. That’s why businesses need strong cash controls — rules and procedures that help protect cash and keep records accurate. What “Cash” Means in Accounting In everyday life, we think of cash as just money in our wallet. But in business and financial reports, cash includes more than that . For financial reporting purposes, cash includes: • Currency and coins on hand • Checks and money orders made payable to the company • Available balances in checking and savings accounts Most companies report cash and cash equivalents together , because both can quickly be used when needed. 1.1 Cash Equivalents (Quick - to - Use Investments) Cash equivalents are short - term, highly liquid investments . This means they can be turned into cash very easily. A key point: They usually mature within three months of the purchase date. Examples of cash equivalents include: • U.S. treasury bills • Money market funds • Commercial paper (short - term corporate debt)

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    Study Guide 1.2 Why Cash Needs Strong Protection Cash is: • Liquid (easy to spend) • Portable (easy to carry away) • Desirable (everyone wants it) Because of this, companies must use adequate controls to prevent theft, fraud, and mistakes. Common cash control activities include: • Segregation of duties • Proper authorization • Adequate documents and records • Physical controls • Independent checks on performance 1. Segregation of Duties (Don’t Let One Person Do Everything) Cash is usually received: • At cash registers • Through the mail To reduce the risk of theft, a company should split cash duties between different people . A good setup looks like this: • One employee receives the cash • A different employee records the cash receipts • A third employee deposits the cash in the bank This matters because if only one person does all three jobs, it becomes much easier for them to steal cash and hide it in the records.

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    Study Guide 2. Proper Authorization (Only Approved People Can Handle Cash) Not everyone should be allowed to handle company money. Companies make sure that: • Only certain authorized employees can handle cash or make cash transactions • All cash expenses must be approved by responsible managers This keeps the company from paying for things that aren’t real, necessary, or allowed. 3. Adequate Documents and Records (Good Paperwork = Better Protection) Managers and employees who are responsible for protecting cash must be able to trust the paperwork behind every cash transaction. That’s why companies rely on accurate, legitimate source documents . Important control idea: Checks and other important documents are prenumbered in sequential order This helps managers track every document and make sure: • Transactions aren’t recorded twice • Transactions aren’t missed completely Also, documents should be sent to the accounting department soon after they are created . Waiting too long increases the risk that errors or fraud will go unnoticed. 4. Physical Controls (Keep Cash Locked and Limited) Cash must be kept physically secure , and companies use several methods to do this. Common physical controls include: • Cash registers should only contain enough money to handle customer transactions • At the end of a cashier’s shift (or even more often), extra cash should be moved to a safe or more secure location • Companies make daily bank deposits so large amounts of cash don’t stay in the building

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    Study Guide • Blank checks are kept in locked, fireproof files because they could be used for forgery The goal is simple: reduce easy access to cash. 5. Independent Checks on Performance (Someone Should Always Double - Check) People who handle cash or record cash transactions should expect their work to be checked. These checks: • Happen periodically • Can occur without warning Example: A supervisor counting and verifying a cashier’s drawer every day is an independent check. This control helps catch mistakes early and discourages dishonesty. Other Helpful Cash Controls Many companies also use extra protection methods, such as: Bonding Employees Most companies bond employees who handle cash. This means the company buys insurance from a bonding company. If the employee steals, the bonding company reimburses the business for the loss. Rotating Employee Duties Companies may also rotate employees between jobs or tasks. This can help uncover: • Embezzlement • Serious mistakes Why? Because a new person may notice problems the previous worker was hiding or missing.

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    Study Guide 2. The Petty Cash Fund Companies usually pay bills with checks because checks create a clear paper trail (a record of every payment). But not every payment is big enough to justify writing a check. That’s why businesses also keep a petty cash fund . A petty cash fund is a small amount of cash used for small, day - to - day expenses , such as: • stamps • minor delivery charges • emergency supplies How big should the petty cash fund be? The amount depends on what the business needs. A good petty cash fund should be: • Small enough that it doesn’t tie up too much company money or become an easy target for theft • Large enough so the company doesn’t have to refill it too often Because of this balance, many companies choose an amount that needs to be replenished about every 2 to 4 weeks . Who manages petty cash? The company assigns one person to be in charge of petty cash. This person is called the: Petty cash custodian (or petty cashier ) Step 1: Establish (create) the petty cash fund To set up petty cash: 1. A company writes a check to the petty cash custodian 2. The custodian cashes the check 3. The cash is stored securely in a locked box or file

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    Study Guide Journal entry to establish petty cash This entry records the creation of the fund: • Debit Petty Cash • Credit Cash Important note about journals In real businesses, this type of entry (anything that credits Cash ) is normally recorded in the Cash Disbursements Special Journal . However, many textbooks and examples use the General Journal instead, just to keep the focus on the petty cash concept without extra columns. Step 2: Paying from petty cash (using vouchers) Whenever an employee needs petty cash, the petty cash custodian prepares a petty cash voucher . A voucher includes: • Date • Amount • Who received the cash • Reason for the payment

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