Control of Cash: Definition & Methods

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  • 0:01 Cash Control
  • 0:27 Components of Cash
  • 1:29 Internal Control
  • 4:09 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

Cash is a valuable commodity and one that is vulnerable to fraudulent activity. In this lesson, you will learn what makes up a company's cash account as well as how to control cash.

Cash Control

One of a company's most important accounts is their cash account. It is also the most vulnerable to fraudulent activity. Because of this, companies need to make sure that they have adequate cash controls in place. What is cash control? Cash control is a way to monitor credit, collection, cash allocation and disbursement policies, as well as invoicing functions.

Components of Cash

Before we can talk about cash control methods, you need to first understand what it is that makes up the cash account. I bet you think it is just plain cash, right? Actually, that's not the case. The cash account is made up of cash and cash equivalents. Cash is essentially defined as money or anything else, such as coins, money orders or bank notes, that a bank will accept as a deposit to a business' account. Also included in the category of cash are things called cash equivalents. Cash equivalents are liquid assets that can be turned into cash within a short period of time and that are not affected by changing interest rates. The higher the liquidity value of a cash equivalent, the quicker it can be turned into cash. The term liquidity refers to how quickly something can be turned into cash. An example of a highly liquid item would be a 90-day CD. This item is not cash that can be deposited into a bank account and credited immediately, but in 90 days, it can be changed over to cash easily and deposited.

Internal Control

The cash account is the one account that can easily fall prey to fraudulent activity. Because of this, it is very important that a company put into place guidelines for managing the cash account. There are a few common aspects of internal control that can and should be used by all companies. To begin with, there needs to be a separation of duties. Along with separation of duties, there needs to be a written protocol for cash handling and disbursement. Let's look at an example below.

Edd owns a retail store. Each employee is given a copy of the company's policies and procedures manual. Edd has the following instructions on cash management in this manual:

  1. Cash is to be removed from register at the end of shift.
  2. Cash register attendant will run the daily sales report and take the cash and the report to the accounting assistant.
  3. The accounting assistant will verify the cash sales for the day, and prepare and make the daily deposit.
  4. The accounting assistant will then give the deposit slip and a copy of the daily sales report to the staff accountant.
  5. The staff accountant will record the deposit in the accounting system.
  6. The accounting assistant will enter all bills into the accounting system and file the bills in the appropriate location in the office of the staff accountant.
  7. The staff accountant will prepare bills for payment and print checks on a weekly basis.
  8. The staff accountant will bring checks that need to be signed to the company owner for his signature.
  9. The accounting assistant will perform the monthly bank reconciliation and have it reviewed by the staff accountant.

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