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Control of Cash Receipts & Disbursements

Control of Cash Receipts & Disbursements
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  • 0:01 Internal Controls Defined
  • 1:04 Cash Receipt Controls
  • 2:36 Cash Dispersal Controls
  • 3:38 Example
  • 5:15 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 something that we all work hard for and certainly don't want to lose to predators. In this lesson, we will discuss cash and how to protect both the receipt and disbursement of cash.

Internal Controls Defined

I have a Great Dane. His name is Turk and he's usually the most well-behaved of all of my dogs, until you throw a loaf of bread into the mix. A loaf of bread is his downfall. Temptation just overtakes him and causes him to throw caution to the wind. Every chance he gets, he snatches bread off the counter. And I get frustrated.

However, I have not been able to establish a good set of internal controls to keep this situation from happening. Internal controls, you wonder. What does that have to do with a dog? And what does either of those things have to do with control of cash receipts and disbursements? I am glad you asked! You see, internal controls are rules and regulations that are put into place to guard assets owned by a person or a company. When it comes to Turk and me, the asset I need to safeguard is bread. In the business world, there is one asset that needs more protection than any other - and that asset is cash.

Cash Receipt Controls

There are two areas that need to be addressed when discussing cash controls - receipt and disbursement. Let's begin our discussion with receipt controls. Cash receipts are money received from consumers for the sale of goods or services.

An effective internal control system will have written documentation explaining how that cash should be handled when it is received, as well as separation of duties. Separation of duties means to separate one big job into several smaller jobs, with a different individual performing each.

In a good cash control system, there would be one person that collects money, one person that enters the transaction into the accounting system and one person who makes the bank deposit. Each activity should have a paper trail that matches. For example, the daily sales report should match the amount of cash received for the day. The audit report and the transactions entered for the daily sales should match. The bank deposit receipts should match the daily transaction report. In a nutshell, everything should cross balance. It is a good rule of thumb to never ever give free rein to one single employee to collect and report the cash account activities. Any employee can fall victim to temptation and reason goes right out the window. Having an effective internal control system would deter such behavior.

Cash Dispersal Controls

Cash disbursements are monies paid out to individuals for the purchase of items that are needed and used by a company. This can be anything from purchasing inventory, raw materials or even utilities. Regardless of the reason for the cash disbursement, there must be internal controls in place to safeguard against fraud. A good internal control system will break down the cash disbursement responsibility into at least two separate jobs. One person should be responsible for entering bills into the accounting program and printing the payment checks, and another person should be responsible for signing those checks. Separating these duties once again enables there to be a system of checks and balances. Without it, temptation could rear its ugly head and cause an otherwise rational person to do questionable things. Checks could be written and signed by the same person and used for whatever they wanted. Bills could be bogusly put into the system just for an individual to write themselves a check. Any number of things could happen.

Example

Let's apply these concepts to a practical example.

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