Section 10.1 - Payment Systems
Both cash receipts and cash payments are considered payment systems.
Cash receipts refer to incoming payments while cash payments refer to outgoing payments.
Cash, in this very broad sense of the word, includes currency, bank deposits, cheques, money orders/bank drafts, credit cards, debit cards, and various forms of electronic transfers (online banking, pre-authorized payments, direct deposits, Interac e-Transfer, Interac Online, private third-party money transfer agents such as PayPal, etc.)
Currency refers to bills and coins, which are the only form of payment required by law to be accepted by vendors in Canada (legal tender).
Deposits include any monies held in a chartered/licensed financial institution (i.e., bank, credit union, etc.) for the benefit of the depositor, e.g., savings accounts, chequing accounts, etc.
Once received, a cheque may either be cashed (immediately exchanged for currency) or deposited (transferred into one's bank account) by the payee (cheque recipient) at the payee's bank, unless it is determined to be an NSF (non-sufficient funds) cheque, in which case we say the cheque has "bounced." Accordingly a certified cheque, wherein the requisite funds are set aside by the payor's (cheque writer's) bank, is the preferred method when paying by cheque.
A money order or bank draft may be used by those who lack a chequing account and is similar to a cheque except for the fact that the payment represented by the money order is immediately set aside by the payor's bank so that payment is guaranteed, not unlike a certified cheque.
Credit card transactions involve the card holder (you), the vendor/merchant/retailer (e.g., The Gap) and card issuers such as public corporations (e.g., VISA, AMEX, MasterCard) and department stores (WalMart).
Debit cards, allowing instant transfers of funds from purchaser to vendor, are made possible via point of sale terminals and the Interac network.
Finally, credit card bill payments and payments to other designated payees via online banking, monthly mortgage instalments and utility bill payments via pre-authorized payments, weekly paycheques via direct deposits, rent payments or money transfers via Interac e-Transfer using the recipient's email address, and online purchase payments involving participating online retailers via Interac Online or third-party money transfer agents such as PayPal may be completed via electronic transfer.
Accounting for Cash Receipts and Debit/Credit Card Transactions
Cash receipts (cheques, money orders, credit card slips, debit card transfers, bills and coins) may be taken in via mail receipts from debtor customers or over-the-counter sales (cash register receipts).
Vendors/merchants/retailers that accept payment by way of debit and credit cards from customers must pay a small fee (approximately 12 cents per debit card transaction or 1.5 to 4% of the sale price per credit card transaction) to the issuers of those cards in recognition of the increased sales such options invariably promote:
Bank - dr - 98
Debit/Credit Card Expense - dr - 2
........................................ Sales - cr - 100
To record credit card sale with 2% merchant transaction fee
Section 10.2 - Accounting for Cash Floats and Cash Short or Over
At the start of each business day, a cash float or change fund is tallied and placed in the cash register.
When the float is first created, a cheque made out to Cash Float is cashed at the bank and a journal entry is recorded:
Cash Float - dr - 100
....................... Bank - cr - 100
Cash Float is an asset account (and not an expense account) as it is only used once when the float is first created.
At the end of each business day, a cash proof is drawn up comparing the cash register tape to the cash in the register (see p. 383).
If the amount of cash in the register (minus the cash float) properly corresponds to the daily sales figures from the cash register tape, the journal entry to record cash sales for the day is simple to prepare:
Bank - dr - 300
............ Sales - cr - 300
That said, it is extremely rare for the cash in the register to correspond exactly with the cash register tape at the close of each business day.
Accordingly, any discrepancy between the two figures is reconciled using the Cash Short or Over account (shortage or overage) in the daily journal entry to record cash sales (see pp. 384-385).
A debit balance (shortage) in this account is treated as an expense while a credit balance (overage) is treated as revenue:
Bank - dr - 295
Cash Short or Over - dr - 5
............................. Sales - cr - 300
To record daily cash sales with shortage
Bank - dr - 305
............Sales - cr - 300
............Cash Short or Over - cr - 5
To record daily cash sales with overage
Business Current Accounts
And finally, daily bank deposits of cash, cheques and credit card slips are made to special low-cost business bank accounts known as current accounts, which pay no interest but offer free duplicate deposit slips and the return of all paid (cancelled) cheques to the account holder along with the monthly bank statement.
Section 10.3 - Accounting for Petty Cash and Cash Short or Over
Many businesses use a Petty Cash fund (usually consisting of a locked box containing approximately $100 in small bills and coins) to pay for inexpensive items such as coffee, stamps and delivery charges.
Three types of journal entries are used with this system:
(1) for establishing the fund
Petty Cash - dr - 100
......... Bank - cr - 100
(2) for replenishing the fund
Delivery Expense - dr - 30
Postage Expense - dr - 40
Miscellaneous Expense - dr - 26
................................... Bank - cr - 96
(3) and occasionally for even increasing the fund
Petty Cash - dr - 50
......................... Bank - cr - 50
(see additional handout from grade 12 textbook)
Like Cash Float, Petty Cash is an asset account (and not an expense account) as it is only used once when the fund is first created, unless the fund is subsequently increased (see above).
A voucher, usually attached to a receipt, is placed in the petty cash box each time funds are drawn to pay for small expenditures.
Accordingly, at any given time, the total of cash and vouchers in the box should equal the predetermined balance of the fund, e.g., $100.
Note that expenses (e.g., Delivery Expense) are only recorded when the petty cash fund is finally replenished.
Essentially the act of replenishment serves not one but rather two purposes: (1) to return the cash level inside the petty cash box to its predetermined balance (e.g., $100) and (2) to simultaneously allow for the recording of the vouchers/receipts inside the box as expenses of the business.
Any discrepancy between the total of cash and vouchers in the box and the predetermined fund balance is once again reconciled using the Cash Short or Over account in the journal entry to replenish the petty cash fund.
And just as with the cash float, a debit balance (shortage) in Cash Short or Over is treated as an expense while a credit balance (overage) is treated as revenue:
Postage Expense - dr - 50
Delivery Expense - dr - 45
............................. Bank - cr - 93
............................. Cash Short or Over - cr - 2
To replenish petty cash with overage (assuming $7 remaining in petty cash fund prior to replenishment and receipts totaling $95)
Section 10.4 - Internal Control
Internal control refers to those elements of an accounting system that promote honesty, accuracy and efficiency among employees and management.
Proper internal control procedures protect company assets from theft and waste, ensure accurate accounting data, encourage efficiency and promote adherence to company policies.
Examples of such procedures include: multiple yet independent preparation of accounting records, divided control over physical assets and record keeping pertaining to such assets, daily deposits of cash receipts, deposit slips prepared in duplicate, cheques deposited featuring restrictive endorsement “For Deposit Only”, payment by cheque or debit/credit card or electronic transfer only, independent audits of accounting records, and clearly defined and segregated employee responsibilities.
Below you will find a comprehensive listing of proper internal control procedures with exercise:
INTERNAL CONTROL PROCEDURES
Often the greatest risk to a company’s assets and resources comes from within the firm itself - in other words, from those who are actually employed by the firm.
An accounting system that ensures honesty, accuracy and efficiency amongst a firm’s managers and employees can be described as one that promotes good internal control.
Internal control is the unique set of accounting procedures and office policies designed by each firm to protect that company’s assets from misappropriation and waste, to ensure accurate and reliable accounting data, and to encourage adherence to company rules.
The more workers a company employs, the more important a good system of internal control becomes.
The following examples of internal control rules and procedures (both general and cash-specific) are fairly common to most large North American firms:
General Rules of Internal Control
1. Wherever possible, two different employees should be responsible for preparing accounting records independently of one another, and hopefully, after comparison, their work should agree.
2. An employee who has physical control over the firm’s tangible assets should not also be responsible for recording transactions in relation to those same assets.
3. All company assets (e.g., cash, computers) should be stored in a safe place after hours.
4. Two authorized employees should always be present when negotiable instruments (e.g., cheques, promissory notes) or contracts are dealt with.
5. Only a few key employees should be authorized to approve transactions such as purchase orders and sales invoices.
6. Only an independent public accountant should carry out regular audits of the company’s books.
7. Employee responsibilities should be clearly defined and segregated so as to ensure accountability.
Specific Internal Control Procedures for Cash
8. An employee who handles cash should not also be responsible for keeping the records for cash. For example, the employee who opens the mail in order to organize the cheques received from debtor customers should not be the same employee who prepares the cash receipt daily summary.
9. All cash and cash receipts (cheques, credit card slips) should be deposited daily so as to minimize the amount of cash on hand.
10. Other than petty cash and cash refunds, all payments should be made by cheque or debit/credit card or electronic transfer of funds, and not by cash, so as to ensure that a paper trail (i.e., evidence) is generated.
11. Cheques received from debtor customers should immediately be restrictively endorsed “For Deposit Only” so as to reduce the risk of being cashed improperly.
12. Daily bank deposit slips should be prepared in duplicate and a stamped copy of the slip (i.e., stamped by the bank teller) should be retained by the company as evidence of the deposit.
13. The company’s Cash/Bank account (in the ledger) and bank account (as evidenced in the monthly bank statement) should be reconciled monthly via the preparation of a Bank Reconciliation Statement, so as to take account of the company’s outstanding cheques and late deposits, in addition to bank debit memos, customer NSF cheques and accounting errors.
INTERNAL CONTROL EXERCISE
The following scenarios describe the unacceptably poor behaviour of the management and staff at Goldkind & Hughes LLP, Chartered Professional Accountants. For each of the following, indicate which rule of internal control is being violated.
1. The clerk responsible for the firm’s daily cash deposits routinely discards the duplicate deposit slip stamped by the teller.
2. Every night dozens of company laptops are left in plain view within the office.
3. Every June a CPA employed by Goldkind & Hughes prepares an audit of the company’s books.
4. At least eight individual office assistants have authority to order office supplies on behalf of the firm.
5. Purchases of office supplies by the firm are routinely made with cash.
6. Cheques received from the firm’s debtor customers are routinely cashed by Brian Goldkind, one of the firm’s founding partners.
7. The firm’s cash and cash receipts are typically deposited at the end of every week.
8. Every morning the mail receipts are opened and then recorded by the firm’s Senior Office Manager.
9. Each of the company’s three Junior Office Managers has been assigned responsibility for carrying out daily inspections of the firm’s client contact records.
10. A bank reconciliation statement is only prepared at the company’s fiscal year end every June.
11. The firm’s CFO recently executed (signed) a $1 million promissory note with the bank on behalf of the company.
12. Every Thursday a single accounting clerk oversees the preparation of the firm’s weekly payroll.
13. The employee in charge of allocating office supplies to the company’s various departments is also responsible for preparing receiving reports of those same items.
Internal Control - Bank Reconciliation Statement
Finally, company bank accounts should be reconciled monthly via a Bank Reconciliation Statement. In this way, a company’s actual bank account figure (balance per monthly bank statement) is compared to the company’s general ledger Bank account figure (balance per books) at the end of each month so that any discrepancies may be accounted for in terms of outstanding cheques, late deposits, bank service charges and interest payments, NSF cheques, note collections, interest earned and/or bookkeeping errors.
Click below for a comprehensive description and illustration of a monthly bank reconciliation statement with exercise: