Since cash is the most liquid of all assets, a business cannot survive and prosper if it does not have adequate control over its cash. Cash is the asset with the greatest chance of “going missing” and this risk is why we must ensure we have strong internal controls built around the cash process. Since many business transactions involve cash, it is a vital factor in the operation of a business. Of all company assets, cash is the most easily mishandled either through theft or carelessness. To control and manage its cash, a company should:

• Account for all cash transactions accurately to ensure correct information is available regarding cash flows and balances.
• Make certain enough cash is available to pay bills as they come due.
• Avoid holding too much idle cash because excess cash could be invested to generate income, such as interest.
• Prevent the loss of cash due to theft or fraud.

When a merchandising company sells products to customers, it usually takes payment right there in the form of cash, check, or credit card.

In the case of cash, a clerk takes the money, records it, and places it in a cash register. The presence of a customer as the sale is rung up usually ensures a cashier enters the correct amount of the sale in the cash register. At the end of each day, stores reconcile the cash in each cash register with its cash register tape or computer printout for that specific register.

Did you know? The cheapest and easiest internal control test is by involving the public. If a company requires all transactions to be entered in the cash register, the company can do a “promotion” to verify employees are following this. The promotions would be like “If your receipt has a red star on the back, get a free cookie” or “If you do not get a receipt, receive a free drink.” Sound familiar? The public is now looking for a receipt for each transaction and will ask if they don’t receive it. The benefit of finding theft will outweigh the cost of giving away a little free food.

Businesses selling to other businesses often extend credit, allowing the purchasing company to pay later via check or bank transfers. Companies vary in how they implement internal controls, but they usually observe the following principles:

• Prepare a record of all cash receipts as soon as cash is received. Most thefts of cash occur before a record is made of the receipt. Once a record is made, it is easier to trace a theft.
• Deposit all cash receipts intact as soon as feasible, preferably on the day they are received or on the next business day. Undeposited cash is more susceptible to misappropriation.
• Arrange duties to ensure that the employee who handles cash receipts does not record the receipts in the accounting records. This control feature follows the general principle of segregation of duties given earlier in the chapter, as does the next principle.
• Arrange duties to make sure the employee who receives the cash does not disburse the cash. This control measure is possible in all but the smallest companies.

For example, a company may have the person opening the mail prepare a record of the checks received as soon as they are received. This “pre-list” goes to the company treasurer or controller, or some other third party who is not responsible for recording them. The checks go to the accounting department and the payments are recorded in the general ledger (GL), credited to the customer account, and then sent to the bank for deposit, but not before the deposit is compared to the pre-list to make sure everything is there. Then the deposit is eventually traced back from the bank statement to the GL (most likely during the reconciliation process).