Accounting Principles I – Cash - Quick Guides

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Study GuideAccounting Principles I–Cash1. Cash ControlsCash is one of the most important assets a company has. It’s also the easiest asset to take or misuse.That’s why businesses needstrong cash controls—rules and procedures that help protect cash andkeep records accurate.What “Cash” Means in AccountingIn 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 coinson hand•Checks and money ordersmade payable to the company•Available balancesincheckingandsavings accountsMost companies reportcash and cash equivalents together, because both can quickly be usedwhen needed.1.1 Cash Equivalents (Quick-to-Use Investments)Cash equivalentsareshort-term, highly liquid investments. This means they can be turned intocash very easily.A key point:They usuallymature within three monthsof 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 Guide1.2 Why Cash Needs Strong ProtectionCash is:•Liquid(easy to spend)•Portable(easy to carry away)•Desirable(everyone wants it)Because of this, companies must useadequate controlsto prevent theft, fraud, and mistakes.Common cash control activities include:•Segregation of duties•Proper authorization•Adequate documents and records•Physical controls•Independent checks on performance1. Segregation of Duties (Don’t Let One Person DoEverything)Cash is usually received:•Atcash registers•Through themailTo reduce the risk of theft, a company shouldsplit cash duties between different people.A good setup looks like this:•One employeereceives the cash•A different employeerecords the cash receipts•A third employeedeposits the cash in the bankThis matters because if only one person does all three jobs, it becomes much easier for them to stealcash and hide it in the records.

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Study Guide2. Proper Authorization (Only Approved People Can Handle Cash)Not everyone should be allowed to handle company money.Companies make sure that:•Onlycertain authorized employeescan handle cash or make cash transactions•All cash expenses must beapproved by responsible managersThis 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 thepaperwork behind every cash transaction.That’s why companies rely onaccurate, legitimate source documents.Important control idea:Checks and other important documents are prenumbered in sequential orderThis helps managers track every document and make sure:•Transactions aren’trecorded twice•Transactions aren’tmissed completelyAlso, documents should be sent to the accounting departmentsoon 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 keptphysically secure, and companies use several methods to do this.Common physical controls include:•Cash registers should only containenough money to handle customer transactions•At the end of a cashier’s shift (or even more often), extra cash should be moved to asafe ormore secure location•Companies makedaily bank depositsso large amounts of cash don’t stay in the building

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Study Guide•Blank checksare kept inlocked, fireproof filesbecause they could be used for forgeryThe 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:•Happenperiodically•Can occurwithout warningExample:A supervisor counting and verifying a cashier’s drawerevery dayis an independent check.This control helps catch mistakes early and discourages dishonesty.Other Helpful Cash ControlsMany companies also use extra protection methods, such as:Bonding EmployeesMost companiesbond employeeswho handle cash.This means the company buys insurance from a bonding company.If the employee steals, the bonding companyreimburses the businessfor the loss.Rotating Employee DutiesCompanies may also rotate employees between jobs or tasks.This can help uncover:•Embezzlement•Serious mistakesWhy? Because a new person may notice problems the previous worker was hiding or missing.

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Study Guide2. The Petty Cash FundCompanies usually pay bills withchecksbecause checks create a clearpaper trail(a record of everypayment).But not every payment is big enough to justify writing a check. That’s why businesses also keep apetty cash fund.Apetty cash fundis a small amount of cash used forsmall, day-to-day expenses, such as:•stamps•minor delivery charges•emergency suppliesHow big should the petty cash fund be?The amountdepends on what the business needs. A good petty cash fund should be:•Small enoughthat it doesn’t tie up too much company money or become an easy target fortheft•Large enoughso the company doesn’t have to refill it too oftenBecause of this balance, many companies choose an amount that needs to be replenished aboutevery 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(orpetty cashier)Step 1:Establish (create) the petty cash fundTo set up petty cash:1.A company writes acheckto the petty cash custodian2.The custodiancashes the check3.The cash is stored securely in alocked box or file

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Study GuideJournal entry to establish petty cashThis entry records the creation of the fund:•Debit Petty Cash•Credit CashImportant note about journalsIn real businesses, this type of entry (anything thatcredits Cash) is normally recorded in theCashDisbursements Special Journal.However, many textbooks and examples use theGeneral Journalinstead, just to keep the focus onthe 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 apetty cash voucher.A voucher includes:•Date•Amount•Who received the cash•Reason for the payment

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